Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

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Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

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.............................tax........Price History............................................................................................................Price History.... 50 Figure 27: Victoria ......................Selected Centres ................................................................. 70 Figure 37: Charlottetown ...........................................Regular Unleaded .................................. 57 Figure 31: Winnipeg ............................................................................ 47 Figure 24: Outlet Volume vs........................................................................Price History.............................................................................................Price History ...............List of Figures Figure 1: Pump Price / Margin Model....................................... 33 Figure 13: Monthly Gross Marketing Margins..........Price History ......... 29 Figure 9: Annual Gasoline Price (Cents per Litre) ...................... ex-tax elements .. 16 Figure 3: 1996 Average Regular Gasoline Margins (56............................................................Price History ...................................................................................................................... Income................................................ 30 Figure 10: CPI Index Comparison ..... 44 Figure 21: Gross Marketing Margin Elements .................................. 69 Figure 36: Halifax ... Pump Price (nominal ¢/litre)... 25 Figure 7: Outlet Representation by Mode.................................................. 28 Figure 8: Outlet Representation by Service ....................................................................................................................................... 48 Figure 25: Outlet / Volume Relationship ........................ 43 Figure 20: Ex-Tax Pump Price Elements . 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) ................................................................. 54 Figure 29: Calgary .......................Price History ....................................Price History ......................8¢ Pump Price) ..................................Price History.......................... 49 Figure 26: Outlet Revenues................Price History ............... 63 Figure 34: Montreal ........................... 66 Figure 35: Saint John NB . 45 Figure 22: Petroleum Gross Product Margins ............Regional & Urban Groupings.......................................................................................................... 36 Figure 17: Study Market Methodology ................ 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) ...... 24 Figure 6: 1995 Retail Outlets by Province .................................................................................... 53 Figure 28: Vancouver .......................... 58 Figure 32: Toronto . Gross Product Margin ................................................................................................................................ 71 MJ ERVIN & ASSOCIATES i ...................................................................................................................................................................... 46 Figure 23: Average Annual Throughput per Outlet......Selected Goods & Services ......... 24 Figure 5: Canadian Retail Outlet Population ........................................ 42 Figure 19: Pump Price ............................................................. 32 Figure 12: Monthly Margins 1991-1996 (Nominal $)............................................................. 40 Figure 18: 1995 Average "Blended" Pump Price ........ Costs................. 34 Figure 15: Monthly Rack Prices: Selected Markets ...... 4 Figure 2: 1996 Average Prices/Margins ............. 56 Figure 30: Regina .....................................................................................................1988-1995 ............................. 35 Figure 16: Monthly Demand vs............................................ 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category.............. 62 Figure 33: Ottawa ......................................................Price History..............................................................................................................................

.................................................................................................. 51 MJ ERVIN & ASSOCIATES ii .... 13 Table 2: Taxes on Regular Gasoline on December 31.. 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue.................................List of Tables Table 1: Downstream Sales Channels ..................................................................................... 1996 .................... 15 Table 3: Selected Study Markets .........................

supplier costs and profitability.8 ¢ TAX 28.2 ¢ 24.4 ¢ 19. rack. dealer income.Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada. Natural Resources Canada (NRCan).1 ¢ 5.3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996.5 cents per litre on the sale of regular gasoline in a typical major urban market. The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold. Price competition occurs at three distinct levels in this industry. and ex-tax pump prices. This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs. together with a separate review of the refining sector.3 ¢ 28. the Canadian retail marketing sector realized an average gross product margin of 3. These prices are determined in a competitive marketplace. Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline.5 ¢ 0. forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3.Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56. and a foundation for effective policy development. and the Canadian Petroleum Products Institute (CPPI). each with unique MJ ERVIN & ASSOCIATES iii . 1996 Average Prices and Margins . represented by crude. This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry. This study.

and accordingly.dynamics. From 1986 to 1995. The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet.000 in 1989. and the traditional automotive service bay. Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $). are examples of ways in which outlet petroleum sales are augmented by other revenues. and declined by 10 cents per litre measured in constant dollars. encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers. well over half of all outlets in Canada operate as lessees or independents. Convenience store. which potentially allow for reduced margins at the gasoline pump. nine of the past ten years. the responsibility for deciding upon retail pump prices resides principally at the local dealer level. ex-tax pump prices declined by 4 cents per litre measured in nominal dollars.500 retail outlets were in operation in Canada in 1995. Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI). The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure. Approximately 16. car wash. demand and other competitive factors existing at the time. While each of these marketing channels operates in a competitive environment. Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry. compared to about 22. due to its prominence in the public and media domain. this study focuses on the retail gasoline sector. Dealers have a variety of relationships with their supplier. The resultant margins are therefore a reflection of the state of product supply. Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv .

however. As a result of these trends. MJ ERVIN & ASSOCIATES v . Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994. Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg.The “tax-included” nominal pump price increased over this same period.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991. while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump. and has been a result of several factors including: • • • improved refinery utilization and efficiency. From 1991 to 1996. as a consequence of refinery plant rationalization (closures) and a modest demand increase.crude) 5¢ Marketing Margin (retail . improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases. This has both resulted in.

This provided for market-bymarket and regional comparisons of key competitiveness indicators. to derive 1995 average petroleum gross product margins for each of the 19 markets. were selected for a detailed review of outlet economics. and one by one. MJ ERVIN & ASSOCIATES vi . With the participation of several CPPI member companies. a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market. With few exceptions. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé.Comparison of Canada. wholesale product cost and freight charges) were isolated from the pump price. proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups. rural markets. 19 markets representing a broad range of conditions. A wide range of petroleum gross product margins were evident. This was integrated with selected NRCan price data. although this study provides an independent confirmation of this. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput. When petroleum gross product margins were compared to their corresponding outlet throughputs. US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study. in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry. That such a relationship should exist was not surprising. several “outside variables” (product taxes. but also had significantly higher throughputs per outlet.

this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii .000. Consequently. corporate charity.000 5. These costs would include salaries of marketing representatives and management. which reflects his investment in the outlet. smaller markets. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. etc.000 2. car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region.000.000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool. supplier profit: after the above costs are allocated. and/or distributed to shareholders. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. the residual revenue is available as profit to be re-invested into retail operations.000. of which gross product margin and throughput are only two of several factors.000. and his personal labour investment.000 Volume (litres) 4. an additional goal of this study was to undertake a comparison of outlet profitabilities. revenues from ancillary operations (eg: convenience store.000 6.• Smaller markets performed as competitively as larger centres. This study showed that an average outlet net revenue in the 19-market study group was about $70.. head office and regional office overheads.6634Ln(x) + 76. brand advertising.962 R2 = 0. sales processing.000 3. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet.000. not poor competition.000. and in major vs.6624 1. which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer. • Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue.000.

rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural.000 $100. suppliers likely incurred a net loss on outlet operations in 1995. respectively. Average Outlet Income (before marketing overhead costs) BC/PR $300.market study group. but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets .$154.000 vs.000) $(150. or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers. distant outlets are clearly higher than those associated with concentrated urban markets. were insufficient to cover outlet costs.000) $(300.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions. Despite this difference.000 per year. Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations. after allowing for estimated dealer profit and supplier overhead. 1.000 $250. The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations.000) $(100.000 $200. it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers.000) $(200. for which this study had no specific data.000) $(350.000 $50. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii . and that petroleum sales revenues alone. $61. The Canadian retail petroleum products industry.000 $150. at 1995 prices. Although an objective measure of competitiveness is elusive. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector.000) $(250.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. by all objective measures available to this study. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector.

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

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While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

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driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

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When these margins were compared to their corresponding outlet throughputs. if Canadian average pump prices were only one cent higher than they were in 1995. the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre. 8. Both the downward trend in margins. serve as perhaps the most significant indicators of competitiveness in the downstream industry. based upon an assumed posted rack price. Outlet throughput is a key determinant of inter-market pump price differences. 7. Thus. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. assuming all other costs were unchanged. Indeed. Thus. these findings clearly show that pump price increases are ultimately linked not to increased profits. A wide range of petroleum gross product margins were evident within the 19market study group. in the long term these fluctuations are likely more reflective of market restorations. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . not excessive profits. but to increases in underlying rack prices. While these economics might appear to place this industry in a position of poor viability. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. this industry sector would have realized profits of unprecedented proportions.• • • improving production efficiency through refinery plant rationalizations (closures). Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. When plotted against the margin-volume model. most markets. Industry profitability is extremely sensitive to very small changes in pump price. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. and the associated industry initiatives which are ongoing in nature. Nevertheless. Also. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). Thus. had petroleum margins which were commensurate with average outlet throughput for that market. despite the predisposition of many observers to use them as such. regardless of size. and in turn. That such a relationship should exist was not surprising. although this study provides comprehensive evidence of this. Also. most outlets used in the 19-market study represent major integrated oil companies. crude costs. virtually all of the 19 study markets exhibited similar levels of competition.

average pump prices were relatively high. more isolated markets are generally higher than in larger centres. isolated markets face particular challenges: although found to be highly competitive. This created some economic pressure to sell product at a higher pump price. • • At first glance. and this study showed that gasoline prices were no exception. Smaller. in order to build upon the findings in this study towards a full understanding of the dynamics at work. The costs of most consumer goods in smaller. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. poor outlet throughputs were generally the predominant factor. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17).5 million fewer litres of gasoline than a group A (major centre) station. according to the margin-volume model. The loss of employment represented by a station closure may be of some concern to smaller communities. the solution would be to encourage some dealers to exit the market. MJ ERVIN & ASSOCIATES xiii . This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. other factors exist which contribute to relatively high margins and prices. reduce pump prices. thereby improving petroleum volumes and ancillary revenues at the remaining sites. which should. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. which could actually inhibit competition.product margins than larger markets. While competitiveness in most smaller markets was shown to be as active as in larger centres. reducing the number of outlets may also reduce the number of competitors. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. there are three points to consider: • • In very small markets. 9. it would seem that if local government in smaller markets were interested in lowering pump prices. A full-serve retail gasoline outlet typically employs 3-5 staff. In suggesting this approach however.

This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. possibly to the detriment of the consumer. This study proposes rather. and in turn. does not appear to benefit in consumer terms. under the current PEI regulatory structure. Also. is both the cause and consequence of increased activity in ancillary operations. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. and the traditional automotive service bay. the Halifax market. depressed petroleum revenues. Convenience store. as marketers find even more innovative ways to attract market share. and likely others in Nova Scotia. 11. car wash. The historical record is clear however: since deregulating pump prices. Retail ancillary operations are a critical element of petroleum price competition. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results.10. characterized by narrow product margins and relatively flat pump prices. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. sometimes below that of outlet operating costs. are an acceptable limitation on pure competition (Finding 8). is viewed as an agency which exists to the benefit of industry and consumer alike. and the perceived effect on their markets. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. as it does in the Canadian petroleum marketing sector. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). many national and local environmental regulations exist for good cause. the degree of price competition in the retail petroleum has in effect. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. will likely preserve a highly competitive petroleum market. has seen a decline in pump prices relative to other Canadian markets. direct regulatory interventions may have an adverse effect on competitiveness. This competition then. MJ ERVIN & ASSOCIATES xiv . were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. that where a healthy competitive climate exists. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). As these findings show. and as such. Charlottetown. is well beyond the scope of this study. The federal Competition Bureau for example.

margins and competitiveness factors. • • MJ ERVIN & ASSOCIATES xv . Public perception measurement. and the converse image held in much of the public domain. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. using Canadian and foreign selected markets. in a simple format designed for consumers and legislators. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. and the nature of competitiveness influences.1. Improve public understanding and awareness of competition in the petroleum marketing sector. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. not inhibit. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. A regular comprehensive competitiveness evaluation. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. along the lines of the model used in this study. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. using Canadian and foreign selected markets. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. This should be in the form of a quarterly summary of price trends and related measurements. petroleum marketing competitiveness. 2. Develop cooperative industry research into marketing sector competitiveness issues.

by industry. using Canadian and foreign selected markets. and regulators alike.• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. and issues/opportunities facing such markets. the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor. consumers. • * * * Better understanding of this industry. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. MJ ERVIN & ASSOCIATES xvi . is vital if Canadians are to put in place the structures that truly meet their social and economic needs. and in particular. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer.

” MJ ERVIN & ASSOCIATES 1 ... to name a few. and regional differences which face the petroleum products retail industry. The SCF laid the foundation for supplementary studies. which comprise the “downstream” oil industry. region by region across Canada... more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump. . This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions. Specific purposes of this study would be: • • • • “. The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry. the Canadian Petroleum Products Institute (CPPI).Introduction Background Canada’s petroleum refining and marketing sectors.to draw comparisons with nearby USA markets. and . . or even communities within the same region. leading to more effective policies and reduced uncertainty for future investment... Project Objectives The working group established as the primary objective of this study “.to provide a sound database upon which more effective policy decisions can be made.to help the industry cope and to enhance competitiveness. provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector. A working group represented by Natural Resources Canada (NRCan). or petroleum marketing portion of the study.” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made. competitive pressures from US and offshore refiners. face a number of challenges: a poor public image. and MJ Ervin & Associates was selected to undertake the “rack to retail”. and a challenging array of potential environmental initiatives.to analyze the rack to retail market and the market structure for refined petroleum products. and Industry Canada was convened to undertake this project... Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry.. and that issues and challenges be identified so that conclusions and recommendations can be made “. and in the process.to better understand the competitive opportunities and challenges. and in comparison to the Canadian national average and nearby USA markets”.. In 1995... including a regional.to determine the key factors which drive competitiveness in specific markets.

presents conclusions and recommendations which arise from the study findings. or which have a specific meaning in the context of this report. It also relates consumer demand patterns to pump price fluctuations. through a multi-faceted approach. and a foundation for effective policy development. Supporting data to these charts can be found in Appendix II. Part D: Selected Market Study presents the findings of a diverse 19-market study. it provides a comprehensive tool to understand the dynamics of this vital and complex industry. from which some important findings are made. Specific comparisons of specific Canadian and US consumer markets were not made.The study meets these objectives. • Part E: Conclusions and Recommendations summarizes the study findings and. and the effect of competitiveness on each subsector. The study does provide comparisons with US markets on a national level of detail. Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. undertaken as part of this project to: • make a more detailed examination of price. Unless otherwise stated. and in order to provide insights into the range of competitive dynamics that can exist. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation). Findings are stated in bold and are summarized in part E of this report. Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 . margins and demand patterns over the past several years. Ultimately. due to the considerable data gathering difficulties that such an approach would entail. Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. in Appendix I. Part C: Historical Trend Analysis provides an overview of prices. Many of the findings in this report are presented in graphical form. Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader. an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them.

Ministère des ressources naturelles du Québec. Suncor Inc. Petro-Canada. assisted in securing the support and participation of member companies in the selected markets phase of the study. Environment Canada. Imperial Oil Ltd. including Ultramar Canada.. NRCan.. facilitated some of the data gathering needs of this study. and Shell Canada. Finally. through Bob Clapp. and Industry Canada. MJ ERVIN & ASSOCIATES 3 . These included: Canadian Tire Petroleum. for their assistance. CPPI. through Maureen Monaghan and Huguette Montcalm. and also participated in the steering committee. Natural Resources Canada. chaired the steering committee. Shell Canada. We gratefully acknowledge these companies. The Canadian Petroleum Products Institute. and their 481 retail associates whose outlet data was used in our analysis.• Industry Canada.. through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI). Petro-Canada. Consumers Association of Canada. • • Several organizations participated in two key review sessions. Suncor Inc.. Ontario Ministry of Environment and Energy. and provided critical guidance and feedback at several key stages in the process. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study.

The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector. pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry. These relationships can be modeled.which is used by many groups and individuals to assess the competitiveness of the petroleum industry. And. but simply. In fact. its price. as this study shows. the particular quality of gasoline which is of most interest to consumers is not its colour. Yet. multifaceted industry. It is this particular feature of petroleum products . To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline. and serves to explain several factors that together determine retail gasoline prices at any given time. texture. This price/margin model thus creates a common reference for understanding the economics of retail gasoline. principally of motor gasoline. An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 . or taste. as they are in Figure 1.Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast.price . most Canadians relate to this industry in one specific way: as consumers. public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases. unlike many consumer products.

“competitive” may be synonymous with “viable”.Many of the terms introduced and explained in this section are used extensively throughout this study. The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors. Each margin is quantified by its defining prices. it is important to define the term “margin”. evaluating competitiveness is therefore a partly subjective process. MJ ERVIN & ASSOCIATES 5 . From an industry perspective. While this term is often associated with the phrase “profit margin”. these stakeholder revenues are derived from the revenue from the retail sale. and in fact inextricably related. each essentially taking a share1 . but as a dynamic model in constant motion: as competitive forces act to move various price points up and down. This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”. this study examines competitiveness from the latter. Gross margin is simply the difference between two price points. 1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways.from the total pump revenue. an understanding of the term itself is necessary.or margin . objective measurement for competitiveness. While both perspectives are valid. this study’s use of the term relates to gross margin. So defined. typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product). Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard. consumer perspective. Before examining each of the model elements. (implying that the stated margin represents net income or “profit”). is more likely to equate the term with “value for money”. any operating expenses must then be considered before making any determination of profits. margins are squeezed or expanded accordingly. Ultimately however. gross margin represents revenue only. A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study. A consumer however.

this usually requires a reasonable number of competitors. any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate.” “. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 . and unless care is taken to use the word precisely. and the entry of new competitors and new ideas... the degree of competition within a market. one must ask how marketers compete. and ideally many entities offer the same or similar products (brand variety).” Price Competition in the Oil Industry In order to assess competitiveness. as competitors seek to attract market share through lower prices. the result of price competition is reduced profit. if market conditions allow a sufficient number of players to remain profitably engaged. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May. Price competition. An effective functioning of markets also permits smaller competitors to expand if they meet the test. and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive). reducing costs. This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn.Unlike many business or economic concepts. in the sense in which it is something in the public interest. it can frustrate communication and obscure analysis. The actions by business rivals place an upper limit on the prices a firm can charge for its products. provide some means for comparing the type and to some extent. represents a process by which prices are set. Simply put. improving efficiencies.Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged. in order to maintain some level of brand variety. Since a competitive market effectively limits the price option. a universally acceptable definition of competitiveness is elusive. Technological change and innovation are the large levers of competition in industry. This study therefore attempts simply to identify and illustrate competitiveness indicators which together. or in other words. Inevitably. Competition can only be sustained therefore. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors. competitors can either restore higher prices or reduce costs. To achieve this. is the only real option in the long term. such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors. Accordingly. More importantly. 1986: “Competition may mean very different things to different people. Conditions for a competitive market can be deemed to exist when: • • more than one.

The dynamics of upstream and refiner competition are major studies in themselves. and are beyond the scope of this study. p. Price. • Thus described. which in turn defines the margins. In fact. but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius. (Homewood. the raw material from which gasoline is made. in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale. The converse notion that the industry establishes a “should be” margin.. commonly known as the “marketing mix”1. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets. and are generally known as integrated oil companies. It is also important to stress that the market ultimately sets rack and retail pump prices. most Canadians relate more in terms of retail gasoline marketing. where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations. where retail gasoline dealers compete on a local scale to sell gasoline to the motorist. and as will become more evident in this study. Jerome McCarthy. and the downstream industry. Irving. 1960) 2 Although distinct. the most effective of these as a competitive tool is price. some organizations have operations in two or more of these markets. in rack markets. particularly in the crude (upstream) industry and refiner sector. Nevertheless.44 (1st Dec. 4th Ed. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people. New York. or four P’s: Product. and in retail markets. MJ ERVIN & ASSOCIATES 7 . which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. is false. Finding 1: Refiner and Marketing Margins are a consequence of their defining prices. and Promotion. Basic Marketing: A Managerial Approach. Given the commodity nature of petroleum products. where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners. While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production. 1971). so a brief description of these. Within the broad context of the oil industry.the variables at their disposal. Ill.: Richard D. the “oil industry” consists of two distinct industries: the upstream industry. A refiner in Toronto may well compete with a refiner in Buffalo. the geographic scale of competition is an important consideration. competition in the crude and rack markets deserves some mention. which in turn defines a proper market price. Place. whose main 1 E. whose main activity is the exploration and development of crude oil.

this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption. from the exploration for potential crude or gas reserves. production. it is probably sufficient to say that. in several commodities trading centres around the world. consequently. due to variables such as crude quality. that is to say. Canadian producers are known as “price takers” rather than “price setters” of crude prices. and refinery production methods. rather than a fixed value. In providing historical comparisons of crude to rack/pump prices. MJ ERVIN & ASSOCIATES 8 . While this study focuses on the downstream industry (and in particular. which gives an accurate portrayal of month-to-month crude price fluctuations. which it does on a continuous basis. implying that it fluctuates. Crude oil is a commodity which is traded in a global marketplace. which finds and produces crude oil . gasoline grade.activity is the refining of crude oil into petroleum products. Canadian producers have virtually no influence over world crude prices. a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry. The upstream industry’s crude price is represented in Figure 1 as elastic. and transportation of crude oil to the refinery plant. its marketing operations). drilling. Canadian producers must compete to sell their production to refiners.the raw material from which gasoline is made. and in the open market structure that exists in Canada. Within the scope of this study. Infrastructure The upstream oil industry encompasses a broad range of operations. Although this industry is not the focus of this study. alongside major producing countries such as Saudi Arabia. it is important to examine its relationship with its neighboring downstream industry. as a minor contributor to the world crude supply. It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline. Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate. our crude prices rise and fall according to price benchmarks established far beyond our own shores. and the delivery and sale of these products to the consumer.

oil producers must explore for potential reserves. or roughly 34 percent of the pump price. involving energy. maintenance. personnel. and from this feedstock. drill for. Although a description of the process of turning crude oil into gasoline is outside of the scope of this study. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. As a general measure: Finding 2: 1996 average crude price. manufactures a range of refined petroleum products including gasolines. in the petroleum sector. is the provincial government. day-to-day plant operations are cost-intensive. and numerous safety and environmental safeguards. who manufacture petroleum products from crude oil. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners. as a factor of the regular gasoline retail pump price. and marketers who. and hopefully realize some production. heating fuels. This sector acquires crude oil. is called the refinery. buy refined products from the refiner and sell them to the end-use customer. crude is only one of several factors that influence pump prices. diesel. A modern refinery is a sophisticated work of engineering. and pay out royalties to the resource owner. its predominant feature is the plant facility which.While some suggest that the price of gasoline should rise and fall exactly with the crude price. The focus of this study is on the marketing sector of the downstream petroleum industry. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however. In addition. and lubricants. which in oil producing provinces such as Alberta.1 cents per litre. and some attention to the refiner sector is therefore given here. MJ ERVIN & ASSOCIATES 9 . was 19. From this revenue. put simply. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. As is typical of many manufacturing organizations.

confidential terms between the seller and specific buyers.this is the “internal” price charged by a refiner to the marketing arm of the same company. Since both crude and rack prices fluctuate according to market forces. the relative competitive strength of any given rack market is difficult to assess. which may cause Gross Refiner Margin to be slightly overstated. they use rack price as their basis. this model only uses the benchmark crude value. not the refiner sector. rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product. less the price at which it bought its raw material2 (rack price minus crude price). which provides an independent and objective determination of rack-based gross refiner margin. The existence of rack price in a given market is not of itself.Price/Margin Model Elements For simplicity. being squeezed or expanded between these two price points. reflecting the cost of transporting the crude from the producing region to the refinery plant. Of these three refiner prices. the gross refiner margin is the price at which the refiner sells its refined product. 1 Dealer Price is not included here. In simple terms. only rack price information is readily available in the public domain. external measurement of the current market value of a particular petroleum product. In fact. there would be little or no market-driven competitiveness in the refiner sector. but with no material effect upon the Gross Product Margin derivation. transfer price . On a national basis however. the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. since the market-driven rack price provides an objective. many of which do not have integral refineries. If for example. Contract and transfer prices are not openly shared. Canadian refiners produced only sufficient product to supply their own networks of retail facilities. The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. While refineries are always rack price points. Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™. In fact the refiner typically pays a higher price than the benchmark crude price. as this price point exists within the marketing sector. 2 MJ ERVIN & ASSOCIATES 10 . This margin provides for plant operating costs as described above. and accordingly. representing major Canadian population centres.the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement. contract price . as they relate to negotiated. For simplicity. Although contract and transfer prices are distinct from rack price. which can be broadly categorized as follows1: • • • rack price . For a competitive rack market to exist. refiners sell their product under a variety of arrangements. some clear competitiveness indicators exist.the price charged for immediate supply on an “as available” basis. and a return on the considerable capital investment in the plant facility. a considerable volume of petroleum product must actually trade using rack price as the transaction basis. Wholesale volume data is not readily available on a market-specific basis. the gross refiner margin is elastic. indicative of a competitive wholesale rack market.

In examining the structure of the Canadian refiner sector. These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price). in order to maintain realistic accountabilities within each of the two sub-sectors.000 km) for overland truck transport. most refiners also participate in the marketing and retailing of petroleum products. it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive. The mechanisms that drive rack prices are more fully discussed on page 36. as there is no obvious market mechanism to regulate its setting. but where pipeline or marine fuel terminal facilities exist. who compete for a share of this demand. In practice. 1 Based on Octane Magazine Retail Outlet Survey data. Canadian refiners must therefore be price competitive not only with each other. and in the case of gasoline. integrated refiner-marketers establish transfer prices at. many US and European refineries are in practice. There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price. As shown in Figure 15 (page 35). In practical terms. The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market. the question of the internal selling price. market-driven rack prices.for example. who themselves do not refine petroleum products. due to the relatively small transportation cost. even overseas. potential sources of wholesale product supply for most Canadian non-refiner marketers. rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America. petrochemical producers. market-driven Rack (wholesale) pricing of petroleum products. but at the expense of marketing income. from any one of several regional refiners.Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure . or transfer price. for example. to major industrial consumers. In these cases of so-called “integrated” refiner-marketers. but with their US and European counterparts. MJ ERVIN & ASSOCIATES 11 . wholesale refined product is bought and sold across very large distances. arises. to so-called “independent” petroleum marketers. Integrated Refiner-Marketers In Canada. With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply. would produce better than expected refiner income. and which supply petroleum to about one-third of all retail outlets in Canada1. or close to. this limits a marketer to a relatively short range (perhaps 1.

Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. including mining. as a popular and relevant “window” on the petroleum marketing sector. product is sold from a central facility. this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector. Within this industry sector. and aviation. the most recognized element of the downstream oil industry. each with its own distinct infrastructure. trucking. Marketing operations within this sector can be broadly classified into three elements. Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations. in the minds of many consumers. home heating. • • MJ ERVIN & ASSOCIATES 12 . Retail Sales to the domestic motorist. It is this sector which has direct contact with the petroleum consumer and it is this sector. For this reason. and who essentially deal directly with the refiner. Wholesale Sales to a wide variety of customers. which “sets” the retail price of gasoline. this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually. principally into commercial trucking operators’ vehicles. Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. farming. and purchase at or near the established rack price. or in the case of cardlock facilities. media and regulatory attention. gasoline price and competitiveness issues attract considerable public.Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model.

using delivery tank trucks. Before examining this sector in detail. Direct sales generally do not involve any marketing sector infrastructure. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general. Sales to spot buyers at posted rack price. such as product transport and/or storage. for example. typically at the “rack point”. which is generally less than the rack price. as discussed. These outlets usually have considerable inventory capacity. Sales of home heating fuels to residential furnace oil customers. Sales of petroleum products (principally gasoline) through retail gasoline outlets.500 retail gasoline outlets in Canada. Retail outlets are operated in a variety of modes. MJ ERVIN & ASSOCIATES 13 . There are over 850 cardlock outlets in Canada. to the aviation fuel consumer. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet. In major centres dedicated Home Heat centres provide this service. at a negotiated contract price. Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier. Sales to major industrial accounts. Sales of petroleum products through bulk sales outlets. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities. often delivered by pipeline or ship/barge. Sales to commercial and industrial accounts by the wholesale marketing sector. as principal elements of petroleum marketing operations. There are about 16.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts. and usually supply customers by delivery to the customer’s own storage tank. by delivery tank truck. one final element of the pump price model must be reviewed. Sales of aviation fuels at major and secondary airports across Canada. in smaller centres. There are over 1. heating fuel delivery is an integral part of a bulk sales outlet. usually involving some aspect of the marketing sector infrastructure. according to the contractual relationship between the supplier and the dealer. Sales to non-refiner petroleum marketers.300 bulk sales outlets in Canada. and regular gasoline in particular. which primarily serve long-disttance truckers and commercial delivery and haulage operators. to the motorist consumer.

or roughly 50 per cent of the pump price. As part C of this study shows. stable amount. in a small number of markets. PST). The petroleum industry acts as a collector of these taxes. and seven percent GST.2 cent (0.6 cents per litre (Canada 1996 10-city average).Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin. 1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues. If the pump price decreases for example. A three-cent drop in pump price. Table 2 shows the provincial tax content for retail gasoline. would include a roughly 0. municipal taxes. provincial sales tax. regardless of market conditions. this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1. 1 Due to the application of GST (and in Quebec. which amount to 28. typically made up of: • • • • a ten cent per litre federal excise tax. for example.3 in Quebec) drop in the tax content. tax content does fluctuate somewhat with pump price changes. MJ ERVIN & ASSOCIATES 14 . the tax content of the petroleum price is essentially a pre-determined. the tax content of retail gasoline in Canada has increased steadily over several years.

0 cents is charged in the greater Victoria and Vancouver areas respectively.7 18.5 Total Tax 24.7 3.6 25.5 cents was introduced in the Montreal and surrounding area in 1996.7 30.5 cents and 4.1 32. MJ ERVIN & ASSOCIATES 15 .0 10.2 10.0 27.7 13.5 6. plus a 6. All Quebec gasoline sales are subject to a 15.0 10. An additional pump tax of 1.0 28.0 10.0 10.0 3.5% sales tax applied to the GST-inclusive pump price.2 24.0 10.0 28.0 10.5 14.0 15.8 4.0 10.1 25.5 3.6 3.3 10.0 4.0 10.0 11.2 cent per litre pump tax.6 22.0 9.3 20.0 10.0 16.2 24.9 3.3 27.0 10.Table 2: Taxes on Regular Gasoline on December 31.6 3.0 10. Provincial Tax 11.3 Federal Excise Tax 10.6 3.4 3.8 note 1 note 2 An additional tax of 1. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave. Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders.0 GST content (7% of pump) 3.0 3.5 12.0 10.6 3.0 14.

1 cents per litre. operating modes.1 ¢ 5. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average).4 ¢ 19.5 ¢ 0.3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28. the brand supplier’s costs.Regular Unleaded1 NOT TO SCALE PUMP PRICE 56.8 ¢ TAX 28. or 34 percent of the pump price. MJ ERVIN & ASSOCIATES 16 .3 ¢ 28. including retail outlet distribution. Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements.2 ¢ 24. 3. was available for product marketing operations. Upstream operations realized 19. namely the dealer’s costs and income. It also provides an overview of the industry in terms of several infrastructure parameters.3 cents per litre. The residual.5 cents per litre (after freight cost). and the retail gasoline sub-sector in particular.3 percent of the average regular gasoline posted pump price. this section provides a view of the Canadian petroleum marketing sector. and potentially. based on regular unleaded gasoline. and ancillary operations. or 9 percent. or 50. some profit return for the shareholder.6 cents per litre.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. Refiner operations realized 5.Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry. to derive a representative value for regular gasoline gross product margin in Canada. Figure 2: 1996 Average Prices/Margins . This 1 Prices and margins reflect a Canadian 10 city average.

gross product margin represented 6 percent of the Canadian average regular gasoline pump price.5 cents per litre. or “rack to retail” margin. is the second of two elements of the downstream oil industry. was 5. Both refiner and marketing margins have been in decline over the past several years. Freight MJ ERVIN & ASSOCIATES 17 . The marketing sector then. As the product leaves the refinery plant. the finished product (gasoline. and is often out-sourced to third-party common carriers. and it is depicted in Figure 1 as a fixed cost element. is defined by the marketdriven price points of ex-tax pump price. Although many petroleum marketers conduct their own freight operations. In referring to marketing margins and product margins.3 percent of the average urban price of regular gasoline in Canada. In 1996. the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline. it falls into the domain of the marketing sector. and rack price. Freight cost does not typically fluctuate. Based on the 1996 data. as part C will describe.3 cents per litre. Bloomberg rack price values were used as the assumed wholesale price. It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer. This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale. was 3. is usually the gas station. this is seen as a “non-core” business. Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work. petroleum taxes accounted for 50. See page 10 for further explanation. and is then transported to the retail outlet. for example) is sold/transferred at the current rack or transfer price. In 1996. the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market. three key findings can be stated: Finding 4: Finding 5: In 1996. which in the case of retail gasoline. The gross marketing margin.

and upstream/refiner margins. Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 . together with gas station dealers. petroleum marketers.5¢ Product Operations Freight 0. Gross product margin is therefore defined as gross marketing margin less freight cost.3¢ 3.costs are generally less than one-half cent per litre in most major Canadian cities. rural markets experience higher pump prices than do larger centres. but at an average cost of over $200. typical of any retail business.6¢ Refiner Operations 5. Unlike most other retail enterprises however. Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products. Figure 3: 1996 Average Regular Gasoline Margins (56. which are typically close to a wholesale rack point. • Product sales: Within this domain. incur a variety of costs. as it represents 80% of all retail gasoline sales.1¢ Tax 28. as it excludes the “outside variables” of tax. As represented in Figure 3. freight. but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small.3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study. This is a particularly useful measurement in comparing retail gasoline markets.000 per outlet. storing and dispensing a product such as gasoline adds considerably to the operating cost. an average gross product margin for regular gasoline in a major Canadian city was 3.8¢ Pump Price) Upstream Operations 19.5 cents per litre in 1996. Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL). and is therefore a poor comparative tool. Posted pump price includes all of these variables.

Irving.: Richard D. etc. Although revenue from this product is factored into the study market economics in Part D..retail gasoline sales respectively1. and 9 cents per litre for premium gasoline.” or four P’s: Product. • Product In the past decade. marketers compete for the consumer’s choice of transportation energy (for example. Price competition has forced marketers to optimize outlet revenue. The grade differential varies somewhat from city to city. Basic Marketing: A Managerial Approach. Higher octane grades are more expensive than RUL. and Promotion. Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. A portion of the market certainly responds to this type of competitive strategy. RUL prices are therefore most often cited when relating historical price trends. but most consumers view gasoline as a commodity. and the price difference between these grades and the RUL price is referred to as the grade differential. or when comparing price levels between markets. 1960) MJ ERVIN & ASSOCIATES 19 . Place. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level. marketers compete to be represented in as many and/or the best locations as possible. Place Typically. In order to measure competitiveness. In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector. This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5. Simply put. it represents a very small percentage of total retail petroleum sales. 2 E. competitive strategy of this type focuses heavily on selecting the best place. will ultimately purchase based on price.). competitive activity can be observed when a marketer alters one or more of the variables at their disposal. Today. but in 1995 was typically 5 cents per litre for midgrade. expanded product/services offerings such as convenience items. Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content. Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity. 1971). Today. This study does not examine such a broad issue however. seasonal blends. Environmental concerns and associated costs have dictated greater selectivity in developing new sites. Jerome McCarthy. rather than the most places. commonly known as the “marketing mix2. page 24). and confines itself to the more specific (and popular) issue of brand competition for retail gasoline. propane vs. 1 Diesel is another petroleum product sold at many retail outlets. a number of factors preclude this type of strategy.44 (1st Dec. as gas stations proliferated. Price. gasoline). Ill. (Homewood. and accordingly. p. marketers have attempted with some success to differentiate their product offerings from other brands. 4th Ed. additives. one must ask how marketers compete.

is less clear. • Price In most markets. promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions. due to the largely commodity nature of petroleum product. Establishing an objective measurement of price as a competitiveness indicator however. and due to the already slim margins available to marketers. low prices and/or margins.contrary to some public perception. gasoline is viewed by consumers as a commodity uniform in quality and widely available.• • closure of non-viable outlets. This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector. fluctuating pump prices are a significant indicator of robust competition among marketers. this study examines the dynamics of price competition in considerable detail. • • • While examples of all of these indicators are abundantly in evidence. and therefore “trades” within a relatively narrow price range. it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators.while uniform pump prices are sometimes cited as evidence of industry collusion. MJ ERVIN & ASSOCIATES 20 . their subsector margins. price has proven to be the most widely used competitive tool by gasoline marketers. Promotional activity seems to have decreased in the past few years.that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature. and more importantly. Promotion In the gasoline retailing sub-sector. Examples are: • prominently displayed prices . This study presents an extensive historical and comparative analysis of pump prices. In this context. caused by price competition. As such. uniform prices . gasoline is a commodity. in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next. At its extreme. free item with purchase or special price item with purchase. Examples of promotional competition are: • • • brand identity gasoline discount coupon. probably due to its relatively high cost. Consequently. Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness. price clearly remains the predominant competitive tool used by Canadian gasoline marketers. volatile pricing manifests itself in the form of a price war (see below). volatile prices .

the supplier may temporarily intervene. and provide to the dealer what is commonly referred to as price support. and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. for example). 1 This does not occur at company operated or commission outlets. the wholesale rack price. Pump prices therefore tend to move uniformly within a very short time. adjacent dealers. One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level. Finding 7: Price uniformity and price volatility. are indicators of a competitive market. This is a misconception. since they too must restore their gross product margins to sustainable levels. the effect on many consumers is immediate: they will drive into that station. one must adopt the perspectives of both consumers and competing. or when prices rise or fall apparently in unison. A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers. Pump price signs are an ubiquitous feature of the retail gasoline industry. If the posted price increase is too high. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. the relationship between the supplier and dealer is generally as described on page 25. who then react quickly to the change. since there is no “dealer margin”. obviously at the expense of the supplier margin. bypassing the higherpriced outlet. gross product margin will eventually diminish to a point that is not viable for a majority of competitors. Whether through falling pump prices or rising rack prices.where the ex-tax pump price is equal to. but to competitors. competitors will likely match this price. There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs. facilitated through street price signs. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other. The effect of this upon the gross marketing margin is obvious: it is squeezed. competitors may not follow. MJ ERVIN & ASSOCIATES 21 . If one dealer decides to reduce pump prices (by two cents. there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs. When this occurs. While this support may take one of several forms.When pump prices are uniform. in an attempt to gain market share. in order to maintain a reasonable market share. or even being squeezed to zero . its effect is to restore some measure of the dealer margin. Price Support In times of “normal” pump prices. To understand the phenomenon of uniform pump prices. or even less than. In the case of lessee or independent dealers however. The other dealer has little choice but to quickly match. or even undercut the competitor’s lower price. assuming that the rack price is unchanged. But if the pump price increase is a reasonable reflection of the underlying change in gross product margin.

While this study does not intend to undertake a detailed review of the effect of the Act. control over retail pump price effectively reverts to the supplier. Nova Scotia market may provide an example of the potential negative consequences of direct intervention. the petroleum marketing sector has been the subject of several inquiries at federal. however. in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector. The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry. Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”. In addition. There are few current examples of direct government intervention in the pricing of petroleum products. 1997 MJ ERVIN & ASSOCIATES 22 . most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers. provincial and even municipal levels. Conspiracy: where several competitors act to fix prices for the purpose of reducing competition. In addition. Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. An examination of the effect of the Competition Act. 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18. A review of historical retail pump prices in the Halifax. which is administered by the federal Competition Bureau (Industry Canada). or of direct government intervention in marketing. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act. Following a year-long investigation. Price maintenance: where a supplier exerts upward influence on prices upon a dealer. is beyond this study’s scope. These cases have largely involved local dealers and/or isolated incidents. Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices. the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products. resulting in 9 convictions. but reverts back to the dealer when the support arrangement is ceased. the Bureau found that there was no evidence to support these allegations1. and a brief discussion of this case appears in part D. The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition. More recently.Under the provisions of some price support mechanisms.

but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk.500 retail gasoline outlets across Canada. to some degree. creates an obstacle to. exit from an non-viable market. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs. Conversely. sales of gasoline through the roughly 16. or inhibiting. and at least some of this capital cost is regulatory compliance-driven. inhibit competition. This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity. particularly in smaller population centres. The high cost of building a modern retail gasoline outlet for example. Many smaller retail owner-operators. in the form of standards for the decommissioning of retail petroleum sites. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil. A practice. one can cite examples of regulatory obstacles to exit from the retail gasoline market.Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices. This issue is discussed more fully in part D. accounting for roughly 88% of all gasoline demand. It is important to acknowledge that many regulations affecting the retail gasoline industry. but exist to meet other important societal needs. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4). and is the single largest market for gasoline products. These regulations clearly exist to the benefit of all. promotes or limits market-driven pump prices. as outlined above. or incentive for. it is the single largest one. So defined. MJ ERVIN & ASSOCIATES 23 . is in part. that is. creating a need for higher margins. or incentive for. Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature. higher pump prices. for safety and environmental protection. a competitive climate. accounts for about 37% of all refined petroleum demand in Canada. and consequently. Retail gasoline sales. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks. As a product group however. entry into an attractive market. policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to. accounting for 41% of all petroleum demand. it is clear that government policy plays an important role in facilitating.

it has no practical means to enumerate each and every outlet. as shown in Figure 5.Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6.2% Other 0.9% Diesel Fuel 22.2% Propane /Butane 2.7% Light/Heavy FuelOils 14.1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 .2% Retail Gasoline 37.7% Lube/Grease 1. nor is there any federal or uniform provincial enumeration of retail gasoline outlets.6% Other Gasoline 4.3% Total Sales Volume: 84. Figure 5: Canadian Retail Outlet Population . This survey accounts only for major established retail networks .2% Asphalt/Coke 4.9% PetroChem Feedstocks 5. This study provides an estimate of the actual retail outlet population.452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey.

as one might expect. Distribution of these outlets by province (Figure 6. and the dealer.500 in 1995. and all inventory and revenues belong to the supplier. who manages the day-to-day operations at the retail outlet. to about 16. Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 . There are two main stakeholders involved in the marketing of retail gasoline: the supplier.The estimated number of retail outlets in Canada has declined from 22.000 outlets in 1989. exist between retail dealers and their suppliers. and this is of some importance with respect to the matter of prices and competition in this sector. using Octane counts only) is roughly equivalent to population densities. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14. The supplier. and usually owns the brand name seen at the retail outlet.513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1. who holds initial title to the refined petroleum as it leaves the rack point. The principal dealer and attendants are salaried employees of the supplier. controls the setting of the pump price. Several possible relationships. as owner of the product. the retail outlet is owned and operated entirely by the product supplier. Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. or modes.

the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode.the entire gross product margin accrues to the brand supplier. The “dealer” is in essence. Since the supplier owns the petroleum product at this type of outlet. an employee of the supplier supplier supplier typically the dealer. Control of Pump Price Dealer Compensation supplier a commission from the supplier. based on pump sales volume.sub-component margins . the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee. supplier salary from supplier. and pays them from his commission revenue. who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode. The dealer in turn hires attendants. the supplier retains control of the retail pump price. usually based on cents per litre of petroleum sales. who pays all outlet operating costs. but the outlet operator (“dealer”) is compensated by a commission payment. The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 . the outlet facilities and petroleum inventory is owned by the supplier.

and means of compensation supplier. and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists. not the supplier. dealer-established retail price. and sells at the posted pump price. The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher. and sells at the posted pump price. unlike rack or pump prices. Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. MJ ERVIN & ASSOCIATES 27 . The margin between these two prices is the dealer’s gross revenue. the retail facilities are owned by the dealer. The margin between these two prices is the dealer’s gross revenue. and has control over the retail pump price. This Dealer Price.product from the supplier at a “Dealer Wholesale” price. who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode. This dealer margin is defined as the pump price (ex-tax). can vary considerably from one supplier to another. The dealer pays most or all of the expenses associated with operating the outlet. The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition. who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee. and in turn resells to the motorist consumer at a higher pump price established by the lessee. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. less the Dealer (wholesale) Price charged by the brand supplier. since it is predicated on contractual arrangements between the dealer and the supplier.

This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace. some general figures are mentioned here. virtually none of the major integrated outlets are company operated. While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study. Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell. The remainder represent one of over 50 different marketer organizations. This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price. MJ ERVIN & ASSOCIATES 28 . during a price war) as previously described. It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector. Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products. Petro-Canada. 1 Unless the dealer is under a price support arrangement (for instance. who themselves establish pump prices. Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1. In addition.Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. or Imperial Oil). and fully two-thirds operate as lessees or independents. There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets.

While an average outlet throughput may be in the order of 2. These improved outlet throughputs have provided for improved petroleum revenue potential. and is a result of. Canadian throughputs have dramatically improved in the past several years .a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken. the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing. has had a profound effect on the retail gasoline marketing sector. to over five million litres in major markets such as Toronto. Improved outlet revenue from ancillary operations has caused. which in part has led to a reduction in retail product margins. average annual throughputs ranged from under 1 million litres in smaller population centres. Most ancillary services are operated by the dealer/lessee. who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space. Figure 8 depicts the Canadian representation of several key ancillary services. Based on a sampling of outlets surveyed in this study. Many outlets have more than one ancillary offering: many “flagship” outlets for example. In effect. more fully described in part C. In fact. reduced petroleum margins. Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 . ancillary service has had the consequence of subsidizing the pump price of gasoline. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline.5 million litres. these study findings show that this can vary widely from market to market. The proliferation over the past two decades of ancillary services such as convenience stores and car washes. feature both a large-area convenience food store and a modern car wash facility.

Since rising prices are common to most consumer goods and services. the “Canada average” price reflects an average of urban markets only1. using a Canada 10city weighted (by provincial demand) average.Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector. MJ ERVIN & ASSOCIATES 30 . would be somewhat higher. an examination of the specific historical record of gasoline prices is useful. Since 1 Data is not regularly collected on smaller markets. including smaller markets. and with which the reader should be familiar. when the Persian Gulf War caused crude prices to increase significantly. in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995. as can be seen in part D of this study. prices are for regular unleaded (RUL) gasoline. This part examines broad trends in several areas. While some of the presented findings are selfexplanatory. Regional and market-to-market comparisons are presented in greater detail in part D. particularly around 1990. This shows that pump prices have increased in nominal terms. An “all markets” average. Unless noted. As such. Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price. many utilize terms which are explained in part A. mainly using Canada average values. Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising.

gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate). ex-tax equivalent prices. nominal pump prices decreased.Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages. Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs. as defined in part A of this study. rack price.1990. and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes. fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices. In constant dollars. and relative crude cost. MJ ERVIN & ASSOCIATES 31 . When pump prices are reduced by the amount of tax content. retail pump prices were about 7 cents less in 1995 than they were in 1986. 1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices. both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995. Figure 10: CPI Index Comparison . as in Figure 10. Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years. there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes. It also depicts the associated margins. When compared to other consumer goods.

From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994. If. as shown in Figure 12. MJ ERVIN & ASSOCIATES 32 . as the next section shows.Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. as might be suggested. the downstream industry operates on a “cost-plus” basis. it simply passes on a fixed cost margin to determine the “correct” pump price. Margin History While Figure 11 provides an indication of key price trends. the presence of these additional market factors have operated to the benefit of consumers. and in fact have displayed a declining trend over the past six years. it is also useful to examine the behavior of margins. and the rise in the tax content. Figure 12 shows that industry margins have not been constant over time. due to additional market factors which affect pump and rack prices at any given point in time. It is important to state that pump price changes do not occur in exact lock-step with rack prices. as Figure 11 shows. which are defined by the price points. that is. In fact. the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products. which in turn. nor do rack prices exactly follow crude costs. This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period. then one might expect margins to be quite constant over time. and have risen slightly since 1994. are principally a reflection of changes in the underlying price of crude oil.

the actual fluctuation is much more pronounced than shown. since the chart is based on monthly averages. This shows that on a monthly basis. improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases. Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres. which have both shown a consistent decline throughout the period 1991 to 1996. A more thorough discussion of specific market factors for these and other centres appears in part D.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs. several factors. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack .crude) 5¢ Marketing Margin (retail . Finding 13: From 1991 to 1996. In particular. compared to the Canadian average. as local competitive factors act to self-regulate pump prices. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. this upward trend is not attributable to “downstream” refiner or marketing sector margins. not weekly or daily data. and has been a result of. including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase.Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. The decline in refiner and marketing margins has both resulted in. 1 In fact. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre. MJ ERVIN & ASSOCIATES 33 . the gross marketing margin can fluctuate quite significantly1.

Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 . although Canadian pump prices in urban markets are clearly higher than in the US. A comparison of Canadian and US regular gasoline pump prices. with and without tax.Figure 13: Monthly Gross Marketing Margins. this is wholly attributable to the difference in taxation. is presented in Figure 14. Canadian pump prices have been roughly equal to. This difference accounts for most. US pump prices. for several years.Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs. if not all of the difference in pump prices between Canada and the US. This shows that. US Price History The retail gasoline tax structure in Canada is vastly different than the US. or even less than. On an ex-tax basis. resulting in significantly higher Canadian gasoline prices.

• Although this study shows that on an ex-tax basis. and moving up or down more or less in unison. The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise. have improved considerably. Prior to 1994. Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners. as a result of outlet closures (see Figure 5. From this it can be seen that Canadian and US rack prices. trading at any given time within a relatively narrow (about 2 cents per litre) range. largely as a result of two factors: • Canadian marketing margins have decreased in this period. This is no longer the case however. RFG has not been introduced to Canadian markets.Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. page 24) and somewhat increased demand. behave in a very similar fashion. Figure 15 compares these values for selected Canadian and US centres over a period of several years. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 . both a cause and an effect of improved throughputs and ancillary revenues as previously described. Canadian outlet throughputs (although likely still less than those of the US). when compared on an ex-tax basis. This would be a useful area for further research. Canadian ex-tax pump prices were historically somewhat higher than in the US. Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts. While these trends have also occurred in the US. which is reflected in US average pump prices. there are likely some differences in the competitive dynamics in US markets compared to Canadian markets.

000 34¢ 2. of motor gasolines from 1991 to 1996. Figure 16: Monthly Demand vs.000 2.000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg.900. Pump Price (nominal ¢/litre) 3. and prices tend to fall. Simply put.000 1. and as would be expected in any commodities market under these conditions. Demand vs.900. and falling in the latter half of each year.500. To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense).000 24¢ 1.500. but in fact across the North American continent (US demand follows a similar pattern). Price History Figure 16 shows the history of Canadian gasoline demand. As non-refiner marketers attempt to secure a supply of this diminishing inventory. albeit less distinct pattern. not only in a given market. Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”. increasing significantly every spring.100. Yet in the latter half of each year. Gasoline price exhibits a similar.700. compared to average ex-tax regular gasoline pump price for the same period. a “buyers market” develops.That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets.700. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 .100.000 2.000 2. This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories.000 2. or sales. conditions begin to favour a “seller’s market”. Gasoline demand exhibits a very regular seasonal pattern.000 1. rising and falling closely in step with demand. any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America. or indeed anywhere.300. as demand ebbs and inventory improves. the price tends to be bid upwards.

competing to meet their own needs. Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels.3%. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike. the downstream petroleum industry. MJ ERVIN & ASSOCIATES 37 . and product taxes which add to the consumer price of gasoline. The traditional supply-demand model predicts that when demand rises. the essence of a free market economy. On a long-term basis however. and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market. in that prices have fallen. while average ex-tax pump price declined by 14% (since 1994. pump prices have increased due to a significant rise in crude costs in this period). so do prices. despite a rise in demand. All of the findings suggest that. which ensures a competitive product price for buyer and seller alike. Figure 16 shows that from 1991 to 1995. This part of the study presented a number of historical views of retail gasoline prices. demand rose approximately 8. and this is clearly demonstrated in the case of gasoline prices on a seasonal basis. The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada. a feature of most marketregulated commerce.Whether in the spring or the fall. their related product costs and margins. which consists of the refiners and marketers of gasoline and other petroleum products. while world crude prices and Canadian taxes have generally increased over the past several years. as evidenced by declining industry margins. This is of course. has operated in a highly competitive environment. gasoline prices have not followed the traditional model.

is useful in providing broad overviews of industry price and margin trends. so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee. etc. but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres. ancillary revenues. Nineteen markets were therefore adopted for the study (Table 3). outlet volumes. Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. and a more detailed examination of price. These “outside factors” tend to obscure the more relevant aspect of pump price. outlet costs. namely product margin. • Methodology Selection of Markets A number of markets were selected for the study. freight. and pump prices alone provide very little opportunity for “comparability”.. there is no regular monitoring of pump prices in smaller centres.Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C. although one was subsequently dropped due to insufficient submitted data. which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool. play a role in a market’s pump price. MJ ERVIN & ASSOCIATES 38 . and in order to provide insights into the range of competitive dynamics that may exist. A number of factors such as taxes.

both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet. Suncor Inc. MJ ERVIN & ASSOCIATES 39 . and Group B markets less than 500. Petro-Canada. its situation in the Greater Vancouver Regional District placed it in the category of a Group A market.are influenced not by one.000. these organizations provided market-level data on freight costs. To this end. 2 Depending upon the outlet mode. Process Overview As illustrated in part A. the gross marketing 1 Although White Rock is clearly not a major centre by itself. To examine the competitiveness of the marketing. member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets. confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets.. and for smaller markets. retail outlet and brand representation. and Canadian Tire Petroleum. but a number of variables.0001. This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences. and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500. In addition. Ontario. Furthermore. retail pump prices . Shell Canada.Each market was classified according to regional affiliation (BC/Prairie.and consequently competitiveness . price history data not available through public sources. Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations. or “rack to retail” sector. In all. Five companies responded to this request: Imperial Oil. it was essential to obtain data not normally available through existing public sources. the gross marketing margin must be examined in isolation from those other variables.

Group B (smaller market) and 19-market study averages. a market-by-market profile of outlet income is presented. to derive the 1995 average gross product margin for each of the study markets. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists.margin is stripped of its freight component. and the final “rationalized” gross product margin was determined for each market. average outlet annual throughput was determined for each market. This allows for an accurate determination of net outlet revenue. 2. average pump prices are higher than actual average regular gasoline prices. as the “blended” price includes other product grades. Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban). Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1. 3. The gross product margin thus serves as an interim basis for comparing study markets. including some smaller centres. 2 Accordingly. Finally. a broad representation of markets was possible. and freight were successively removed from the pump price. in addition to operating cost and ancillary revenue data gathered in the study1. The variables of tax content. Using the derived gross product margins and volumes for each market. rack price. this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices. From participant company supplied data. Where differences in gross product margin might still exist. MJ ERVIN & ASSOCIATES 40 . 1 Although outlet cost and ancillary revenue data was not available for all markets. For each market. tax content. Where applicable. 1995 average values were determined for pump price. by product grade. to arrive at “blended” values2. weighted by sales demand. rack price. these were weighted by volume. and freight.

6. but they are relatively minor. encompassing a significant portion of the entire Canadian market. These differentials do vary from one market to another. freight... grade differentials were based on known differentials of nearby markets. marketing margin. and from one brand to another. as described on page 10. Also. represent a broad range of markets. Bloomberg rack price values were used as the assumed wholesale price..4. or consolidated net incomes. While clear. and accordingly represent a broad spectrum of consumers and marketers. average revenues from ancillary services were added. 5. Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™. accurate comparisons are possible. petroleum revenues. From participant company data. A dollar-per-outlet estimate of these elements was made. these 19 markets represent a combined population base of 8. . Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price. This variation is constant across all nineteen markets however.7 million. Wholesale refined product prices used in this study are therefore likely to be overstated. the effect on the “blended price” is small. When these margins are applied to outlet throughputs as in step 4 above. so that on a cents-per-litre basis. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income. the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets.to determine average consolidated net revenue per outlet. and gross product margins are therefore likely to be understated.. 7. including relatively smaller ones such as Sioux Lookout or Gaspé. MJ ERVIN & ASSOCIATES 41 . and therefore where assumptions were made. and supplier profit. This value was then applied to the gross product margin to determine average outlet petroleum revenue. it is important to understand that the use of rack price in this analysis has certain implications. Unlike retail pump prices however.. Interpretation of Data In some smaller centres. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain. a recognized source of data on world crude oil and petroleum markets and prices. objective data exist for both of these values. perhaps by 1 to 2 cents per litre. The derived weighted average values of pump price. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors. many wholesale petroleum purchases are made at less than the “posted” rack price. etc. also considering that RUL constitutes the majority of product. and outlet operating costs were deducted from total revenue. In referring to marketing margins. product margins. Supplier Overhead costs.

but a variance of only 12. there is little to suggest why such a high variance exists. while lower prices tended to prevail in major centres. The study data suggests that variations in tax rates account for a significant part of pump price differences. The 19-market study group exhibited a statistical variance1 of 17. table J for an explanation of how variance is derived. broken into tax and extax components. independently gathered data. The first of these variables to be examined is tax.38 cents per litre in ex-tax pump price. The data shows a statistical pump price variance of over 17 cents per litre within this study group. Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices. MJ ERVIN & ASSOCIATES 42 . and these tend to interfere with an objective comparison of fundamental competitive differences which may exist. A 6. Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however.8 cent difference in pump price 1 See footnote at Appendix II. The data also shows that typically. accurate.Rack prices used in this study are nevertheless market-driven. Tax Figure 19 shows posted pump prices for the study markets. and based on objective.64 cents per litre in pump price. higher priced markets are associated with smaller population centres. Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets.

tax. was less than three cents. when examined on an ex-tax basis. ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences.while all markets are subject to the same rate of federal excise tax and GST1. or when examining historical price trends. Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry. provincial tax rates can vary greatly. The data shows that taxation between markets within the same province varies little. Upstream and Gross Refiner Margins Although the deduction of tax content is useful. the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry. additional elements of the revenue stream must be further isolated. MJ ERVIN & ASSOCIATES 43 . it is therefore more useful to use ex-tax pump prices when comparing any two markets. but the variance is minimal . thus providing a better basis for comparison.less than one-half cent per litre. As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity. In all study markets. Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28. while taxation between provinces is more pronounced .75 cents per litre (Vancouver. taxes were a significant element of pump price.between Calgary and Vancouver for example. GST content can vary by market. namely the upstream industry and refiner sector. Figure 19: Pump Price . Montreal). as described in part A. accounting for roughly half of the average retail price. This eliminates any effect that tax variability may have. 1 Due to pump price differences.

reflecting some differences in refinery crude acquisition costs. as is examined below. it should be restated that each of these sectors.assuming transport costs did not outweigh the price difference. MJ ERVIN & ASSOCIATES Cents per litre 44 . It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB. the validity of analyzing gross marketing margins in isolation might be raised. and therefore are best analyzed separately.Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining. the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector. the rack price is equivalent to the upstream margin plus the refiner’s margin. When rack price is deducted from the ex-tax pump price. but ultimately. rack price) and gross marketing margin elements. reflecting the reality that at the rack level of competition. and their respective margins. Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining. if a clear understanding is to be achieved. are clearly delineated by market-driven crude. Freight costs are additional. To address this. rack and pump prices. the rack price is set at the rack point (Winnipeg. differ little from those of major centres. in the case of Thompson). the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices. The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group. This is due to the fact that for any market. Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie. as this would cause rack buyers to bring product in from the lower-priced region . Furthermore. one region cannot maintain rack prices at a higher level than another.

For markets which are also established as rack points. Figure 21 shows a study market comparison of gross marketing margins. this freight cost is almost negligible. one final outside variable must be isolated: that of product freight. Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13. with their component freight costs.49 cents per litre (gross product margin). Before using this as an analytical tool however. it is essentially a “non-core” business. For other. in fact. and therefore a significant pump price factor. most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies. particularly in comparisons of major urban markets to small. the data shows that freight is often a significant part of the gross marketing margin.3 cents per litre. It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply.16 cents per litre (gross marketing margin) to 7. Two of the study markets had freight costs in excess of 3. it is therefore important to eliminate the freight variable from the gross marketing margin. MJ ERVIN & ASSOCIATES 45 . To provide a comparative view of the marketing dynamics within the study group.Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector. Although freight operations are often an integral part of many petroleum marketing operations. remote population centres. resulting in comparative gross product margins. Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences. as low as 0. generally smaller markets.0 cents per litre.

Group A (larger population) markets averaged 5. while Toronto. was the highest of the study group. or consolidated net incomes.5 cents).a variance of only 2. In referring to marketing margins. was the lowest.68 cents per litre. The study revealed that: • • Retail gross product margins differ very little between major urban markets .Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market.68 cents per litre1. petroleum revenues. at 14. 1995 gross product margin averaged 5.17 cents per litre. MJ ERVIN & ASSOCIATES 46 . to the resultant retail gross product margin . whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres. For all study markets.06 cents per litre. it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets. which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3. or between any two regions. Bloomberg rack price values were used as the assumed wholesale price. as the 3.6 cents) to the variance in their component gross product margins (7. while Group B markets averaged 7. Gaspé. at 3.22 cents per litre Smaller markets showed a wider variance in gross product margin . Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17. product margins. A 7.5 cent variance in gross product margin is still significant however.the gross revenue available to the petroleum marketing sector for its operations.6.5 cent per litre average relates to regular gasoline in major markets.5 cents per litre average Gross Product Margin cited in Part B.42 cents per litre.95 cents per litre.

000 2.000 litres per year (Toronto).000 5.14. Indeed. it would likely be so unprofitable as to be un-viable. Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group. Figure 23: Average Annual Throughput per Outlet 6. A wide range of volume performance is evident. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow. 3.000. vs.000. a wide range of variability still exists between markets in the study group .000 litres per year (Sioux Lookout) to over 5.000 4.differences between markets. If these two factors are related to each other as they are in Figure 24.2 cents per litre in Gaspé.000 1.1 cents per litre in Toronto. ranging from under 700.000. if any retail gasoline outlet located in the Toronto area for example. a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 . an examination of related outlet throughput volumes is necessary.000. once isolating retail gross product margin from all of the “outside” pump price factors.000. To understand why such a wide range of margins can exist after eliminating all tax and freight variables. sold significantly less than 5 million litres of petroleum per year. Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets. for example.000 Litres 3.000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that.000.000.

000 2.000 6.a low volume outlet would be much less profitable than one in the same market with significantly higher volumes. On average however. the Group A market outlets had roughly 50% more throughput than Group B outlets . Smaller markets perform as competitively as larger centres. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. all market groups (BC/Prairie.95 cents). the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput.Figure 24: Outlet Volume vs.000 3.6634Ln(x) + 76. This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.7 million respectively. It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5.000.000. As most outlet operating cost are fixed in nature .000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin. Although MJ ERVIN & ASSOCIATES 48 . not of poor competition.962 R2 = 0. compared to 2. while those with high Gross Product Margins tend to have low outlet throughputs. they remain essentially the same regardless of volume changes . Regionally.that is. Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4.000.000. Ontario. With few exceptions.000.000.4 million litres annually. an outlet with low throughput would derive less petroleum revenue than a high-volume outlet. it follows that higher gross product margins will be the consequence. and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput.000 5.6624 1. If all outlets in a given market experience generally low throughputs.000 Volume (litres) 4.42 cents) than smaller (Group B) population centres (7.

and the resultant consolidated net revenue. ancillary sales. Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise). car wash. and must be examined. and incur many expenses in the course of their commerce.716 .000 3. such as convenience stores.000 2. and ultimately shows that very little difference in competitiveness exists between any two markets. competitiveness occurs between retail outlets.000. while operating costs are those costs which are directly incurred in the operation of the retail facility. Gross product margin. product cost. Figure 26 summarizes total outlet petroleum sales. this is likely due to the higher incidence of Group B study markets within this region. in addition to petroleum sales. less outlet costs. supplier overhead costs. which for the study group. two additional factors are introduced: ancillary revenue and outlet operating costs. is only a measure of petroleum revenue per litre. and supplier MJ ERVIN & ASSOCIATES 49 . supplement their incomes with other revenues.the revenue available for dealer income.000 4. as described below. Consolidated Net Revenue per Outlet To create a complete.000.000. It represents the residual revenue which is available to the dealer and to the supplier.000.000 6. which. averaged $69.Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1. Ancillary revenues are those derived from non-petroleum sales sources. These additional factors clearly have an effect on the relative competitiveness of retail markets.Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions. Figure 25: Outlet / Volume Relationship .000 5.000. and auto service.000. however.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences. outlet-based view of retail markets. In reality.

000) $(250.000 $150.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. Table K).$154.000 $50. MJ ERVIN & ASSOCIATES 50 . as explained below. In effect.000) $(100. causing the weighted average for Quebec / Atlantic to be depressed). which reflects his investment in the outlet.Group B outlets were not as profitable as these revenue values might suggest.000) $(300.000 $250.000 per year respectively . Finding 19: Based on published rack prices. reduced pump prices.profits. petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets. Costs. Figure 26: Outlet Revenues. An examination of these component elements reveals a significant finding: that for most markets. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations.000) $(200. Most markets showed relatively similar net revenues (see Appendix II.000) $(350. Income BC/PR $300. As described above.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist. these ancillary operations contributed to a lower product margin and consequently. Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets . Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer.000 $200. consolidated net revenue is the residual revenue which is available to the dealer and to the supplier.000 vs. and his personal labour investment. petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied. $60.000) $(150. although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue. A discussion of the ultimate distribution of this revenue is useful.000 $100.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

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Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

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Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

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a 60. and with access to wholesale product by several means.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price . while average throughput ranked 4th.542. Vancouver is also a terminal for a refined products pipeline from Edmonton. and also has local refining capacity.000 1. contributing to a higher than average pump price.968 litres 7.extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 .000 barrel per day plant located in the greater Vancouver area.89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.38 ¢ 7.98 ¢ 0. net outlet revenues were less than those of other major centres. Influence of other markets: Although relatively close to the US border. Margin/Throughput relationship (Figure 24): Gross product margin was slightly high. driving distances preclude most Vancouver consumers from routinely accessing this neighboring market. Low consolidated net revenues may have contributed to the higher margin.745 18 446 2.Vancouver population # of brands # of outlets outlets per 10.658.ex tax Canada Average . This may explain the somewhat elevated gross product margin in this market. Vancouver provides several perspectives into retail marketing. ranking 11th. The somewhat high margin placed this market slightly above.60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets. Geographic / Supply / Freight cost considerations: As a port city. as described below. Overall. Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs. Vancouver collects a 4 cent per litre municipal tax. this market has access to numerous refiners along the Pacific coast through marine supply. Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average. Figure 28: Vancouver . but well within a cluster of markets with similar throughputs.

the study data found little to suggest a material effect upon representation. MJ ERVIN & ASSOCIATES 55 . thus providing some unique characteristics for the market study.45 ¢ 7. In all respects. prices.604. Geographic / Supply / Freight cost considerations:. at least in this market. Despite its relatively small size. Freight costs were accordingly low compared to other small markets in this study. or competitive dynamics. Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver. prices in this market have historically mirrored those of Vancouver. due to its proximity to one. gasoline “cross-border shopping” is less pronounced than might be expected.White Rock population # of brands # of outlets outlets per 10.53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC. price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors. This suggests that. Average outlet throughputs were relatively high. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip. This market is close to its usual rack point.630 litres 7. but less than most markets with a small population base. White Rock’s margin was typical of markets with similar outlet throughputs. Vancouver.98 ¢ 0.90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. this market is subject to a 4 cent per litre municipal tax.000 16. adjacent to the United States border. Price history / Taxation: Although no specific data is available. and retail gross product margin was less than that of markets with a similar population base. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. White Rock is essentially part of a major market due to its proximity to Vancouver. Influence of other markets: Although this market is a border-crossing community.315 4 8 4. the White Rock retail gasoline market displayed the same attributes as a major urban market. This is likely due to the fact that unlike many smaller markets. Like Vancouver.

Price history / Taxation: As the figure below shows. Calgary is of sufficient size to support a viable rack market.24 ¢ 6. Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics. Consolidated net revenue: was typical of other major markets in the study group. creating some competitive pressures (see Nanton). Other considerations: Of the markets studied. This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis. on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price. Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market. Calgary had the third highest number of retail brands.47 ¢ 0. Calgary pump prices are very close to the Canadian average.ex tax Canada Average . Influence of other markets: Calgary is fairly remote from US and other major markets. Rack-to-outlet freight costs are among the lowest in the study group.000 710.827.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price .4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. pump prices in this market have historically been well below the Canadian 10-city average.675 27 313 4. which was one reason for selecting Calgary as a study market.extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 . Some smaller markets in the vicinity have occasionally priced below Calgary.23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada. indicative of a strong competitive climate.719 litres 6. Figure 29: Calgary . Indeed.Calgary population # of brands # of outlets outlets per 10. Product is usually sourced from Edmonton refineries via pipeline.

Figure 30: Regina .794 litres 7. Influence of other markets: Like Calgary.Regina population # of brands # of outlets outlets per 10. and therefore experiences no particular influences from any other major market.ex tax Canada Average .21 ¢ 7. it is likely that this reflected a surplus of wholesale inventory within the local market or region. Regina was of some interest as a study market. Since 1993. Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity. and is therefore a recognized rack pricing point. This is partly due to provincial taxation levels. and a history of volatile pump prices. Since then. Although no supporting data is available. which are among the highest in Canada. Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets. Ex-tax prices are also above average.50 ¢ 0. Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group. margins and throughputs were typical of other markets with a similar population base. and this market is now more typical of other large population centres.extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 . reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average.089. this market is removed from other significant markets.Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price . supply/demand is likely more balanced. Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity. price volatility has eased. Consolidated net revenue: was typical of other similar markets.29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity.000 179.180 15 86 4.80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average.

000 616. although.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price . probably related to a regional surplus of wholesale inventory (see Regina).ex tax Canada Average . this market has exhibited relatively stable pricing.217 litres 8. it is an established rack price point.22 ¢ 7. possibly due to modest ancillary revenue.84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable. This may reflect a lower than average Consolidated Net Income. Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market. prices have tended to stay somewhat above the Canadian average. Influence of other markets: Like Calgary. Price history / Taxation: In the early 1990’s this market experienced some price war activity.265. and therefore experiences no particular influences from any other major market.790 17 261 4.06 ¢ 0. Since then.extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 . this market is removed from other significant markets. although there is no study data to support this. though somewhat higher than average ex-tax pump prices. and has remained very close to the Canadian 10-city average. Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs. Figure 31: Winnipeg . like most markets of this population density. Consolidated net revenue: No ancillary or outlet cost data was available for this market.Winnipeg population # of brands # of outlets outlets per 10. On an ex-tax basis.23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.

Nanton had the second lowest gross product margin of the study group. would have an offsetting effect. Nanton was the smallest market in terms of population.51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary. and perhaps healthy ancillary sales associated with highway traffic. this market has a relatively low freight overhead. Average outlet throughputs were relatively low. a feature not available to other.the highest of the entire group .585 4 5 31. While these conditions would normally result in a high gross product margin. more isolated small-town markets.41 ¢ 5. as Figure 24 shows. due to its proximity to one. Nanton had a high number of per capita outlets .91 ¢ 0. in terms of expected petroleum revenues. Consolidated net revenue: No Ancillary or cost data was available. Margin/Throughput relationship (Figure 24): Like some other small markets in the study group. Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices. Its setting on a major highway provides a significant opportunity for attracting highway motorist volume. Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack. While the margin data might suggest that retail gasoline operations in Nanton would not be profitable.071.600.000 1. Due to its highway location and its proximity to Calgary. This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market . Price history / Taxation: In order to attract market share beyond simply the local population. Alberta population # of brands # of outlets outlets per 10. Influence of other markets:. In this respect. although not as low as expected.and a low average outlet throughput. Despite its small size.000 litres 5.far in excess of what would be expected of a community with a population of 1. the Nanton retail gasoline market displayed the same price attributes as a major urban market. Nanton was perhaps the least viable market in the study group. Nanton has traditionally priced either at or below Calgary.55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. it is likely that low operating costs. while others experience consistently high prices. in order to maintain a share of the considerable potential sales revenue that passes through this market. the retail gasoline market in Nanton was not restricted to the local population.Nanton. placing Nanton well below the expected margin. Nanton appeared to benchmark its pump prices to those of Calgary. situated on a major North-South highway to the United States Among the study group. Unlike many of the smaller markets in this study group. MJ ERVIN & ASSOCIATES 59 .

and in fact fell into a tight cluster of four other study markets. Alberta population # of brands # of outlets outlets per 10.623 litres 12. Geographic / Supply / Freight cost considerations: At 1. its normal rack point. Peace River also experiences high freight costs.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. isolated markets. the community of Peace River is subjected to a number of factors which give rise to higher than average prices. other markets.85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply. and due to its isolated locale in northern Alberta. though fairly typical of many smaller.715 6 8 11. Price history / Taxation: Peace River is typical of small. further adding to overall high pump prices. In contrast to Nanton. and was accordingly chosen as a study market. Peace River has among the highest freight cost in the study group.6 cents per litre. high pump prices.157. experiencing relatively high gross product margin and consequently.6 ¢ 10.Peace River. Supply is via tanker truck from Edmonton. this market has little or no influence upon. isolated markets. nor is it influenced by. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. MJ ERVIN & ASSOCIATES 60 .45 ¢ 1.000 6. Influence of other markets: Since it is not located on a major inter-urban thoroughfare. they were comparable to other markets with similar average throughputs.

resulting in per-outlet petroleum revenues which were quite typical of many markets. its usual rack point. this market has little or no influence upon. the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential.975 5 6 4. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. Although ancillary revenues were the smallest of the study group. and in fact fell into a tight cluster of four other study markets. other markets. Geographic / Supply / Freight cost considerations: At 3. thereby creating the potential for narrower margins. they were comparable to other markets with similar average throughputs. a significant portion of which would likely be distributed towards supplier overhead costs. high pump prices. nor is it influenced by. It also experienced high freight costs. Influence of other markets: Since is not located on a major inter-uban thoroughfare. Thompson is among the highest freight costs in the study group. These factors resulted in relatively strong per-outlet net revenues. the community of Thompson clearly falls into the category of a small. and reduced pump prices. further adding to overall high pump prices.014. A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance. MJ ERVIN & ASSOCIATES 61 . Consolidated net revenue: Low outlet throughputs were offset by higher margins. outlet costs were also modest typical of most smaller markets. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with.000 14.08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River.02 ¢ 11. Supply is via tanker truck from Winnipeg. Price history / Taxation: Thompson was typical of small.520 litres 14.01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.Thompson. This however. remote market. Thompson is faced with the dilemma.02 cents per litre. experiencing relatively high gross product margin and consequently.1 ¢ 3. Other considerations: Like other small markets. Although outlets in Thompson appear to be as competitive as those of any other study market. isolated markets. and due to its isolated locale in northern Manitoba. Manitoba population # of brands # of outlets outlets per 10.

36 ¢ 0. and is also relatively close to wholesale supply sources in the US. Margin/Throughput relationship (Figure 24): This market stood apart from the study group. This is likely offset by high operating costs. exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput.extax Toronto Posted Price .478 litres 3. and first in average throughput per outlet. It consequently has a low freight component. Consolidated net revenue: Although no study data was available for this market. With an average “blended” gross product margin of only 3.775 30 546 2. it is likely that outlet ancillary revenues are among the highest in the country.ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 . New York. Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres.275.06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group. Figure 32: Toronto . thus there exists a climate of robust competition. least number of outlets per capita. similar to that of Montreal.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average . Influence of other markets: This market is continuously linked with several other major retail markets. this market ranked first in a number of measures: lowest gross product margin. and a resultant low consolidated net revenue.098.Toronto population # of brands # of outlets outlets per 10. In addition.06 cents per litre.3 ¢ 3. Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity. On an ex-tax basis however. stretching from Pickering to Buffalo. as evidenced by an exceptionally low gross product margin. it had the second highest brand variety of the study group.000 2. Within this region are thousands of retail outlets. an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable. this market was consistently less than the 10-city average.4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5.

margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics. Although petroleum revenues were typical of major markets. several smaller. ancillary revenue was slightly lower than average. Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point. Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin. exhibiting all of the characteristics of robust competition. slightly lower that expected.Ottawa population # of brands # of outlets outlets per 10. Other considerations: While pump prices in this market were somewhat higher than in Toronto. Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis.29 ¢ 5. and operating costs were higher than most. This would suggest that it was as competitive as any other major market of similar size and throughput characteristics.948 litres 5. some of which have on occasion priced below Ottawa (see Nanton and Calgary).extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 . Influence of other markets: Although Ottawa is the only major market in the immediate area.ex tax Canada Average .68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets.97 ¢ 0.004. in fact. freight costs within this market were quite low. and close to the Canadian 10-city average. rural markets co-exist in this area.08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price . Figure 33: Ottawa . Consolidated net revenue: was low.145 19 209 3.000 678.

MJ ERVIN & ASSOCIATES 64 .51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply. somewhat isolated. yet with some potential for cross-border retail competition. average throughputs were modest.73 ¢ 1. Consolidated net revenue: This market showed the highest consolidated net revenue of the study group.22 ¢ 7.000 81.475 10 24 2.Sault Ste Marie population # of brands # of outlets outlets per 10. and accordingly. Influence of other markets: This market is close to a US border market. a product of relatively strong net petroleum revenues combined with lower than average operating costs. Sault Ste Marie is a sizable market. Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput. This would suggest that a significant market share is being lost across the US border. Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point. Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto). partly due to higher freight costs. Freight costs are therefore high.95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.550 litres 8. a consequence of the transport distance from the rack point. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets.465. this Canadian market has some difficulty in remaining both competitive and viable. Pump prices in this market were thus typical of any market with similar throughput characteristics. and between 5 to 8 cent per litre in gross product margin.

000 3. one-seventh the average throughput in Toronto.310 3 3 9. despite its high prices. largely due to higher freight costs. in fact the second highest in the study group. and had the least number of outlets.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group. An average outlet in Sioux Lookout pumped only 694.006 litres in 1995. Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin. although high. so that virtually all sales volume represents local demand only. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck. It therefore presents some unique characteristics for the market study.Sioux Lookout population # of brands # of outlets outlets per 10. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets.96 ¢ 3.06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694. this market experiences a high degree of price competition. with little or no influence from other retail gasoline markets. Freight costs are therefore high. brands. Influence of other markets: This is clearly an isolated market. Consolidated net revenue: No data was available for this market. MJ ERVIN & ASSOCIATES 65 .066 litres 14. Sioux Lookout is well-removed from any major highway. This would suggest that. and outlet throughputs of any market studied.2 ¢ 11. This is a major factor in the high cost of gasoline in this market. was much less than expected for a market of this size.

This market had the highest tax content of the study group due to high provincial tax rates (in 1996. pump prices in this market have a tendency to be volatile. Price history / Taxation: As the figure shows.394.775. Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average. placed Montreal lowest of all study markets in terms of consolidated net revenue. this market ranks first of the study group in terms of brand variety.88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. combined with low petroleum revenues and high operating costs. this market interacts with several other markets in the region. Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes.ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 .13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region.144 litres 5.Montreal population # of brands # of outlets outlets per 10. an additional tax of 1.000 1.3 ¢ 5. This. pump prices in Montreal have generally been at or below the 10-city average for major markets.5 cents per litre was introduced into the Montreal area). thus promoting a competitive climate. and is also relatively close to wholesale supply sources in the US.43 ¢ 0. a function of a competitive rack market and an excess of retail outlets competing for market share. On an ex-tax basis however. Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets. With 32 competing brands. Montreal was included in the selected market study.870 32 866 4.extax Montreal Posted Price . with resultant low average outlet throughputs. It therefore represents a highly competitive rack market. Influence of other markets: Like Toronto. Geographic / Supply / Freight cost considerations: Montreal has local refining capacity.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average . Figure 34: Montreal .

for example).Chicoutimi population # of brands # of outlets outlets per 10.04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. this market has little potential as a rack market.289 litres 12. Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John. a partial factor in the high cost of gasoline in this market.2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base.75 cents per litre. Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. although low. both pump and ex-tax prices in this market were higher than average. within a cluster of other markets with similar attributes. Margin/Throughput relationship (Figure 24): Outlet throughputs. Chicoutimi is normally supplied from the Quebec city rack.605 14 97 8. but is quite isolated from any other markets. yet is geographically quite isolated. Consolidated net revenue: was average among the study group. Nevertheless. were quite typical of markets with similar populations. but as the figure shows. Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base.000 120.08 ¢ 11.250. Gross product margin was accordingly high. In the case of Chicoutimi. MJ ERVIN & ASSOCIATES 67 . this amounted to a reduction of 5.28 ¢ 1. Freight costs are therefore somewhat high. by tank truck.

400 6 13 4. Nevertheless.000 16. Although operating costs are likely to be low in a small market like Gaspé. Influence of other markets: This is clearly an isolated market. Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack. Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border.33 ¢ 14. Gaspé is well-removed from any major highway. Consolidated net revenue: No data was available for this market.17 gross product margin the highest of the study group.Gaspé population # of brands # of outlets outlets per 10.75 cents per litre. so that virtually all sales volume represents local demand only. This is a major factor in the high cost of gasoline in this market. both pump and extax prices in this market were higher than average. Freight costs are therefore high.17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market. in fact the highest in the study group. located at a considerable distance from its rack source of supply.88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981. amounting to a reduction of 5. Nevertheless. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group. a key factor contributing to its 14.900 litres 17. a product of high freight costs and gross product margins. with little or no influence from other retail gasoline markets. in the case.50 ¢ 3. ancillary revenues would likely be modest. this margin was only slightly higher than expected for a market with these throughput attributes. by tank truck. MJ ERVIN & ASSOCIATES 68 .

Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price . Saint John presents some unique characteristics for the market study. Average gross product margin was consequently high. reflected in the high ex-tax pump price.Saint John NB population # of brands # of outlets outlets per 10. with or without a local refinery.52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada.095. Nevertheless. Price history / Taxation: Historically.ex tax Canada Average .000 74. Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets. The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor. Figure 35: Saint John NB . do not differ markedly from any other rack point in the study group. posted pump prices in the Saint John market have closely followed the 10-city average. which for Saint John. Consolidated net revenue: was average for the study group. it is an established rack point. and is capable of shipping and receiving wholesale product through marine facilities. freight costs in this market are low.extax MJ ERVIN & ASSOCIATES 69 .47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.27 ¢ 9. and therefore. Accordingly. Since provincial taxes are among the lowest in the country. resulting in lower than expected average outlet throughputs.970 9 56 7. the Saint John retail market is relatively isolated from other retail markets of any significance.79 ¢ 0. That a major refinery resides in this market might suggest that these prices should be among the least in the country. ex-tax prices were relatively high.694 litres 9. Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner. In fact. retail pump prices are ultimately a reflection of rack prices. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals. this market fell within the expected range of gross product margins as a function of outlet throughput.

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

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Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

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Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

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..... reduced pump prices......... the profitability of the 481 outlets studied appears only marginal........ 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences................................................................................................................ while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre...........Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products.... and likely a negative impact on consumers.... Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads. 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US......................... 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs.................... 50 Finding 20: For the 481 individual outlets studied... the residual represented a net loss to the supplier........ ........51 Finding 21: Based on published rack prices and the individual outlet data....... ................................... the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre................................................. when compared on an ex-tax basis........... 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels. 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences................. 48 Finding 19: Based on published rack prices............... .. particularly in comparisons of major urban markets to small......................... In effect......... these ancillary operations contributed to a lower product margin and consequently............. petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied.............................. a feature of most market-regulated commerce.............................. 33 Finding 13: From 1991 to 1996....... residuals for outlets not studied may be better............ while those with high Gross Product Margins tend to have low outlet throughputs. ......... 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness........................................................ after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements........................... The viability of the Canadian retail gasoline sector as a whole may be somewhat better.................. 71 MJ ERVIN & ASSOCIATES 73 .......... given the possibility of discounts from posted rack prices and potentially lower overhead costs........... which ensures a competitive product price for buyer and seller alike.... are principally a reflection of changes in the underlying price of crude oil........... ............. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations..... remote population centres... ........ which in turn... 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.....

The resultant margins. each with unique dynamics. in comparing Canada average (city) pump prices to those of the United States. 1. 2. by all objective measures available to this study. was shown to be strongly competitive: • A long-term decline in pump prices. price is but one of four competitiveness “tools” available to marketers (product. a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). The Canadian retail petroleum products industry. As described in this study however. Although an objective measure of competitiveness is elusive. was observed (Finding 10). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector. the very margins within which this industry operates has. • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1).Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 . Virtually all of the competitiveness indicators examined in this study relate to price. and promotions are the other three). The study presents such a model. when taxes were excluded (Finding 14). In comparing several diverse markets. On a national level. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. over the long term. when measured in constant and nominal dollars. is mistaken. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement. exhibited a diminishing trend (Finding 13). Rack and pump prices are determined in competitive marketplaces. place. Canadian prices have been at or below US prices in recent years. Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. This has not simply been a result of a decline in underlying raw materials costs. which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline.

the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9). retail petroleum markets are considered local (municipal) in scope. it is important to understand that. presents a competitive disadvantage to Canadian marketers. The latter two can vary considerably from one market to another. but also rack prices and outlet performance. and product margins accounted for 3. the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. and are a predominant cause of inter-regional pump price differences (Finding 16). taxation differences between Canadian and US markets. 3. demand and other competitive factors existing at the time. or 6 percent (Finding 6) of the 1996 average regular pump price. these markets have managed to sustain a certain level of viability and competitiveness. when the “outside” factors (tax. and in some markets. but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. Due to the localized nature of competition in the retail gasoline marketing sector. taxation as an element of public policy is an area worthy of additional research. and accordingly. or even between Canadian markets with differing tax structures. well over half of all outlets in Canada operate as lessees or independents. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study. an exercise that consumers are unlikely to engage in.even negative values. and in some markets. The demonstrated exception to this is in markets directly adjacent to nearby US markets. MJ ERVIN & ASSOCIATES 75 . crude costs accounted for roughly 34 percent (Finding 2). This would entail the tracking of not only pump price. for example) were rationalized. while crude oil markets are considered global in scope and rack product markets are considered regional in scope. This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). since this is the effective range of consumer choice. vary considerably from one population centre to another. This implies that the competitive dynamics pertaining to these retail markets can. refiner margins accounted for 5. In applying such a model to the retail petroleum marketing industry. generally do not serve as competitiveness inhibitors. By contrast. but even in such cases. rack price and freight cost. Dealers were shown to have a variety of relationships with their supplier.5 cents. particularly smaller ones. but given its magnitude. While some markets. municipal levels of government. provincial. and do. experienced higher than average pump prices.3 cents or 9 percent (Finding 5). Petroleum product taxes are levied at the federal. are thus a reflection of the state of product supply. measured against the average outlet throughput for that market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. Taxation is a significant factor in the price of retail gasoline.

MJ ERVIN & ASSOCIATES 76 . further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). This consolidated outlet revenue. Rack prices were shown to not significantly differ between major centres. Retail gasoline marketing revenues. in a highly distinct. Pump price fluctuations can be an indicator of competition in the marketplace. it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). which in turn. the Canadian retail marketing sector realized an average gross margin of 3. Retail pump price changes showed a close relationship to underlying rack prices. is available to provide for all retail marketing operations including outlet costs. Retail pump prices showed a corresponding seasonal pattern. exhibited competitive traits typical of any of the study markets. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto.Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world. This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace. reflecting consumer demand behavior (Finding 15). 4. a price-stable market. constitute a small portion of the retail pump price. supplier costs and profitability. Sioux Lookout. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis. This margin represents gross revenue (after wholesale product and freight cost) which. While price wars are undoubtedly an indicator of competitiveness. 5. In fact. second only to the United States. and a loss in the case of urban markets. the absence of price war activity does not imply a lack of competitiveness. which represent the majority of Canada’s population base. Demand for gasoline was shown to vary significantly according to the time of year. when examined on the margin-volume model. predictable seasonal pattern. incorporated with ancillary revenues and outlet costs. when distributed these three ways (Finding 20). Viewed from this perspective. translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets. fluctuating prices are a strong competitiveness indicator (Finding 7). on the basis of price fluctuation alone. The pump price/margin model shows that in 1996. showed a close relationship to underlying crude prices (Finding 11). and more price-stable markets such as Sioux Lookout. which in turn is the principal driver of ex-tax pump prices. on a per litre basis. dealer income.

not excessive profits. the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre. Nevertheless. have caused. despite increases in tax content and crude costs (Finding 12). and have resulted from. Both the downward trend in margins. but to increases in underlying rack prices. several competitive strategies. crude costs. and the associated industry initiatives which are ongoing in nature. Also. assuming all other costs were unchanged. 7. Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. both of which are beyond the direct influence of Canada’s oil companies. intense competitive pressures in the downstream industry in general. This trend has both resulted in. Also. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). While these economics might appear to place this industry in a position of poor viability. Thus. the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). Thus. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin. in the long term these fluctuations are likely more reflective of market restorations. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. Industry profitability is extremely sensitive to very small changes in pump price. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. if Canadian average pump prices were only one cent higher than they were in 1995. most outlets used in the 19-market study represent major integrated oil companies. Declining refiner and marketing margins. not price. Indeed. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. including: • • • improving production efficiency through refinery plant rationalizations (closures).6. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. based upon an assumed posted rack price. this industry sector would have realized profits of unprecedented proportions. and the marketing sector in particular. Since 1991. despite the predisposition of many observers to use them as such. and has been a result of. these findings clearly show that pump price increases are ultimately linked not to increased profits. It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study. MJ ERVIN & ASSOCIATES 77 . serve as perhaps the most significant indicators of competitiveness in the downstream industry. and in turn.

5 million fewer litres of gasoline than a group A (major centre) station. the solution would be to encourage some dealers to exit the market. That such a relationship should exist was not surprising. had petroleum margins which were commensurate with average outlet throughput for that market. • • At first glance. virtually all of the 19 study markets exhibited similar levels of competition. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. 9. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. thereby improving petroleum volumes and ancillary revenues at the remaining sites. other factors exist which contribute to relatively high margins and prices. When plotted against the margin-volume model. which should. reduce pump prices. according to the margin-volume model. there are three points to consider: • In very small markets. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). more isolated markets are generally higher than in larger centres. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. Outlet throughput is a key determinant of inter-market pump price differences. regardless of size. In suggesting this approach however. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. Although some smaller markets appeared to have higher gross product margins than larger markets. A wide range of petroleum gross product margins were evident within the 19market study group. isolated markets face particular challenges: although found to be highly competitive. MJ ERVIN & ASSOCIATES 78 . although this study provides comprehensive evidence of this. The costs of most consumer goods in smaller. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. most markets. Smaller. it would seem that if local government in smaller markets were interested in lowering pump prices. average pump prices were relatively high. poor outlet throughputs were generally the predominant factor. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. This created some economic pressure to sell product at a higher pump price. and this study showed that gasoline prices were no exception. Thus. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). which could actually inhibit competition. reducing the number of outlets may also reduce the number of competitors.8. While competitiveness in most smaller markets was shown to be as active as in larger centres. When these margins were compared to their corresponding outlet throughputs.

as marketers find even more innovative ways to attract market share. under the current PEI regulatory structure. and the perceived effect on their markets. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. is both the cause and consequence of increased activity in ancillary operations. 10. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. does not appear to benefit in consumer terms. depressed petroleum revenues below that of outlet operating costs. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence.• A full-serve retail gasoline outlet typically employs 3-5 staff. the Halifax market. and likely others in Nova Scotia. Charlottetown. and the traditional automotive service bay. and in turn. 11. The historical record is clear however: since deregulating pump prices. Also. is viewed as an agency which exists to the benefit of industry and consumer alike. the degree of price competition in the retail petroleum has in effect. Retail ancillary operations are a critical element of petroleum price competition. are an acceptable limitation on pure competition (Finding 8). This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). The loss of employment represented by a station closure may be of some concern to smaller communities. The federal Competition Bureau for example. As these findings show. in order to build upon the findings in this study towards a full understanding of the dynamics at work. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. car wash. many national and local environmental regulations exist for good cause. characterized by narrow product margins and relatively flat pump prices. This competition then. will likely preserve a highly competitive petroleum market. MJ ERVIN & ASSOCIATES 79 . Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. is well beyond the scope of this study. has seen a decline in pump prices relative to other Canadian markets. and as such. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). Convenience store. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector.

Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. petroleum marketing competitiveness. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. that where a healthy competitive climate exists. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. This should be in the form of a quarterly summary of price trends and related measurements. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 . This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. 1. margins and competitiveness factors. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. 2. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. Develop cooperative industry research into marketing sector competitiveness issues. A regular comprehensive competitiveness evaluation.This study proposes rather. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. Public perception measurement. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. not inhibit. and the converse image held in much of the public domain. direct regulatory interventions may have an adverse effect on competitiveness. Improve public understanding and awareness of competition in the petroleum marketing sector. possibly to the detriment of the consumer. and the nature of competitiveness influences. as it does in the Canadian petroleum marketing sector. in a simple format designed for consumers and legislators.

using Canadian and foreign selected markets. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. and regulators alike. MJ ERVIN & ASSOCIATES 81 . Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. by industry. the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor. using Canadian and foreign selected markets. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. and in particular.• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. • • • • * * * Better understanding of this industry. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. consumers. using Canadian and foreign selected markets. and issues/opportunities facing such markets. along the lines of the model used in this study. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue.

Appendices MJ ERVIN & ASSOCIATES 82 .

Dealer . CPPI .a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers. Margin .. an association of petroleum refiners and marketers. municipal tax levees. There are several modes (see below) of dealer operation. and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee. which serves as the voice of the petroleum products industry in Canada on environment. such as convenience goods. safety and business issues. but inclusive of any corporate taxes on earnings. diesel.a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry.the retail price of gasoline that would be displayed if all product taxes were removed. Independent Petroleum Marketer .a service provided in addition to the basic retail petroleum sales operation. provincial pump tax. MJ ERVIN & ASSOCIATES 83 . GST. lubricants. and therefore purchases its supply of petroleum product from an outside source. Marketer . Excise Tax .an organization who sells refined petroleum products to end-use consumers. Major Oil Company .a generic term referring to a retail outlet operator. and included in the retail pump price.the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived. independent dealers.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces. the regular unleaded pump price.Canadian Petroleum Products Institute. etc. Grade Differential . health. such as lessees.. Distribution Costs . generally expressed in cents per litre. and in some regions.(for the purpose of this study) the cost. Ex-tax Pump Price .a petroleum marketer who is not involved in the refining of petroleum products.the difference in pump price between a premium or mid-grade of gasoline vs. currently established at 10¢ per litre. and commission dealers.I Glossary of Terms Ancillary service . Downstream . of transporting petroleum product from the rack point to the final point of sale. car wash. for example. such as a retail gasoline outlet. service bays. Usually expressed on a per-unit basis. Integrated Oil Company . in cents per litre.the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline. such as a major oil company or regional refiner/marketer. etc. The ex-tax pump price is exclusive of these taxes. These product taxes include Excise tax.a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier. Lessee .

Rack Point . PCF . usually per month or per year. manufactures (from crude oil) a range of petroleum products suitable for consumer use. Transfer Price . Although in theory the transfer price could be set at any arbitrary value.the volume (ie: in litres) of petroleum sold at a retail outlet in a given period.the segment of the oil industry involved in the exploration and/or production of crude oil. commission dealer. In the retail gasoline sector.the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products. Throughput . with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector. an association of upstream and downstream oil companies and related organizations. these can be broadly classified as company operated. Upstream . or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices.the type of contractual relationship between the supplier and the dealer (outlet operator). it is usually based on the market-driven rack price. the raw material from which petroleum products are manufactured. This may be at a refinery loading terminal.Petroleum Communication Foundation. the supplier has initial title to the petroleum product as it leaves the rack point. Refiner . lessee.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces. Supplier . MJ ERVIN & ASSOCIATES 84 .within the context of retail gasoline marketing. and independent dealer.an organization who.the point at which title to refined product is transferred from the refiner to the supplier.the wholesale price posted at the rack point. Regional Refiner/Marketer . is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products. Rack Price .Mode .

0 42.1 146.2 49.1 104.3 119.5 49.3 160.6 122.4 45.7 22.4 120.1 115.9 118.2 112. 62-010: Consumer Prices and Price Indexes.8 28.5 124. Nominal (¢/litre) (2) RUL Ex-tax Price.7 96.1 117.2 31.1 1990 119.2 109.2 127.3 132.0 115.5 145.8 94.8 130.3 27.3 58.9 122.9 108.3 141. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year.3 19.5 115.7 132.1 48.8 108.5 30.0 93.6 133.5 126.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat.0 93.9 1995 133.9 1993 130. Nominal (¢/litre) (2) RUL Annual Price.4 53.4 104.4 57.9 26.9 155.1 104.9 1994 130.0 19.4 104.0 1991 126.1 105.7 54.4 122.7 30.1 144.2 50.1 87.3 1992 128.2 20.7 29.1 151.5 94.4 34. 1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47.1 97.3 52.4 136.1 120. using a weighted (by provincial gasoline demand) 10 city average.1 167.4 97. No.6 92.3 96.1 120.5 100.2 142.0 30.4 110.4 29.7 123.0 104.6 91.8 93.1 26.1 40. 1986 Constant (¢/litre) (3) RUL Ex-tax Price.4 27.2 133.0 135.9 97.6 107.5 111.1 103.0 32.3 122.2 39.4 134.9 26.2 92.9 115.1 117.5 120.3 1989 114.5 25.6 136.8 104. MJ ERVIN & ASSOCIATES 85 .1 126.2 30.2 45.0 97.6 51.8 106.0 102.3 125.2 99.3 134.3 115.8 95.0 1988 108.7 95.7 118.8 47.4 124.5 112.8 132.8 1987 104.3 55.3 151.2 121.7 122.7 124. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada.3 139.3 40.2 45.8 135.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price.4 152.0 111.

3 58.0 25.9 25.9 23.5 35.2 27.5 27.7 12.3 17.4 13.4 33.3 13.0 26.5 33.6 18.1 21.9 53.9 15.8 30.7 29.8 33.0 54.6 13.5 5.0 26.4 21.2 5.8 24.9 25.1 9.0 16.3 13.0 14.2 25.0 7.8 29.8 14.2 26.3 66.4 55.0 15.1 16.6 54.5 10.4 32.1 23.4 9.2 65.8 28.1 7.0 10.4 12.5 28.9 53.1 5.2 41.9 56.4 13.6 4.3 56.2 16.0 24.2 27.6 54.4 20.2 8.4 29.0 24.0 16.3 14.2 7.0 5.4 26.1 16.7 18.7 25.3 15.7 14.8 13.4 7.8 23.7 31.1 16.4 31.9 17.1 13.8 14.1 22.3 4.3 13.0 12.1 16.7 7.5 15.5 14.5 57.7 63.0 33.1 18.7 34.3 42.9 31.8 55.5 31.1 19.4 58.6 23.2 63.0 4.9 54.5 10.9 4.2 11.0 16.5 27.9 25.6 28.3 54.0 7.0 7.7 23.9 7.6 23.3 6.5 23.8 15.4 26.2 13.2 14.9 26.0 24.2 23.4 22.4 53.4 26.5 32.1 23.7 6.1 29.1 23.3 24.8 57.6 25.7 39.1 39.4 MJ ERVIN & ASSOCIATES 86 .8 9.5 26.4 34.3 56.2 15.3 54.8 14.7 58.7 18.8 8.3 54.7 29.4 15.8 26.2 14.3 13.2 16.6 26.8 11.4 14.0 24.4 14.6 6.Table B: Key Price / Margin History .7 15.9 24.4 14.3 26.9 23.9 58.9 23.0 55.4 31.7 8.9 12.7 29.1 22.6 7.7 14.7 7.3 9.0 52.6 24.4 56.4 30.5 30.7 14.1 52.4 57.5 8.7 14.6 8.6 13.0 8.0 16.9 13.0 13.9 6.3 25.9 22.2 6.7 28.5 56.3 6.1 24.7 4.5 11.6 54.4 8.8 22.2 21.4 24.1 13.2 6.8 23.0 20.3 15.7 7.2 22.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.9 7.2 56.9 6.0 9.0 25.7 32.1 53.4 14.5 22.2 13.9 14.9 14.6 26.5 Gross Marketing Margin Gross Refiner Margin 53.6 21.6 26.8 55.8 21.9 21.1 7.2 4.6 5.2 7.3 12.9 25.8 25.7 4.5 26.2 26.3 23.2 27.8 53.3 22.7 19.9 55.9 25.9 26.1 13.5 54.3 13.2 29.3 22.7 19.2 7.9 55.8 14.7 13.5 7.8 8.2 13.7 24.3 26.0 24.7 14.3 5.5 7.1 18.8 26.9 30.9 6.1 53.9 7.5 23.9 11.7 Downstream Margin 14.6 9.5 19.2 24.7 4.8 21.6 20.0 22.3 Tax Content 23.5 16.2 13.9 4.0 26.8 53.4 24.3 57.7 33.9 9.6 52.0 24.5 23.9 8.0 24.0 28.2 12.1 17.2 7.8 16.2 23.5 14.1 25.2 25.5 25.5 6.6 25.9 56.

0 26.5 21.0 14.7 13.7 3.3 25.0 24.0 12.3 28.9 Downstream Margin 12.9 3.6 15.1 Tax Content 26.1 20.6 20.3 58.4 24.7 26.1 14.5 3.5 11.0 57.4 26.9 27.3 8.6 53.1 24.5 14.2 14.6 21.9 5.4 6.9 12.1 51.3 4.5 6.2 20.5 3.3 26.4 7.1 11.5 17.5 13.4 16.1 55.5 21.5 7.4 26.5 6.7 24.0 6.3 21.4 25.8 6.3 54.6 15.1 15.1 57.1 16.0 28.3 7.1 15.8 27.1 11.3 4.0 25.4 15.3 12.5 54.5 5.2 12.5 6.9 14.6 27.2 4.7 29.9 23.7 53.3 21.3 26.7 14.7 7.0 28.5 19.2 14.3 27.1 15.4 13.3 53.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .8 50.2 7.9 11.6 53.5 5.4 51.2 27.4 6.6 4.7 5.8 23.3 26.6 23.9 17.3 26.8 28.8 10.0 28.5 11.7 18.9 28.0 9.9 6.5 23.6 10.5 21.1 26.4 32.7 15.0 25.8 20.9 9.7 14.7 7.2 25.3 23.6 4.3 9.2 26.5 53.0 54.4 26.1 51.5 55.0 12.4 6.0 52.0 6.4 26.2 54.6 16.5 15.1 61.7 52.1 11.1 11.1 3.8 29.6 19.7 6.7 12.3 28.7 53.1 26.0 9.3 26.9 14.6 9.9 27.0 5.9 49.0 5.2 4.3 55.2 9.0 28.2 26.3 7.4 5.7 5.7 24.1 Gross Refiner Margin 7.3 26.9 19.4 4.3 9.0 26.8 4.2 7.1 6.5 25.5 7.9 49.5 19.4 28.9 29.2 7.0 53.9 26.7 53.7 25.4 11.7 23.6 12.0 11.2 28.2 11.5 20.2 14.2 15.9 4.1 6.6 11.8 25.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.3 26.9 4.7 3.7 13.2 49.5 9.7 25.9 12.1 14.4 21.6 20.5 2.9 58.3 26.8 17.2 26.0 29.5 13.3 13.4 21.3 6.4 25.8 49.0 27.2 Gross Marketing Margin 4.3 9.1 54.2 20.0 14.7 8.1 6.7 26.5 4.5 28.2 7.4 6.0 6.1 10.6 10.8 22.1 21.2 25.7 6.3 26.1 26.7 16.0 28.2 23.8 52.6 17.6 3.8 23.1 6.9 29.8 28.3 4.2 5.1 14.6 5.7 51.

2 26.833 2.029 2.3 22.4 25.045 2.Table C: Canadian Supply.192.477.979 2.246 2.628 3.073 2.3 24.461 3.931 3.324 2.345.473.9 21.056 3.142.270 3.3 Canada Avg RUL Rack Price (¢/l) 35.131.176 3.256 2.958.311 3.998.254.767.329 3.532.294.732.8 23.220.9 23.338 3.182 3.019.3 26.181.1 23.622.572 2.703 2.161.510 3.709 2.839 2.714.301.843.5 19.044 2.518.941 2.242 2.6 21.8 22.095 2.3 23.840.672.7 29.735.558.369 2.262.627 2.796.025.798.710.813 2.469 4.2 24.037 2.1 23.654.620 3.781.281.335 2.083.281 2.720 3.682 3.9 17.966.773.403 2.837.201.140.301.804 2.022.934.853.883.415 2.874 3.152 2.878 2.930.886 3.818.188 3.823.625 2.682.291.202.141 3.7 18.346.164.479 2.179 3.331 2.4 32.4 22.122 2.377.970.498.300.9 26.168 2.4 24.070 3.430.003.642.5 22.6 28.9 30.669.841 2.8 33.026 2.744.976.209.120.589 3.268 2.047 3.930 3.1 16.684 2.389.381 2.416 2.160 3.298 2.476.973.871 2.897 2.354.450 2.600.0 28.785.893.333.5 32.4 29.5 27.3 23.075.369.269 2.509 3.508.8 28.8 MJ ERVIN & ASSOCIATES 88 .0 24.739.933 3.752 2.904.677 3.967 2.322 3.089.4 21.671.5 28.254.379.979 3.321.822. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.887.801.647.8 23.516.456 2.952.199 2.8 30.422.255 3.6 26.633.325 2.651 2.626.002.045 2.2 20.7 21.633 2.801.3 22.4 21.411.101.7 26.709 2.9 31.748 2.130 3.067.748.802 2.455.970.725. Demand.889 3.437.020 2.897.2 23.771 3.206.193 3.051 3.636.299.799.2 27.130 3.644 3.485 2.480.322 2.5 31.9 23.2 23.830.490 3.995.180 2.279 2.630.000 3.765 3.322 2.4 24.5 25.687.969 2.804 3.191 2.370 2.587.112 2.101 2.5 30.039.667 2.2 27.462.592 2.378.831.613 3.641.859 2.475 2.443 2.932 2.316.646 2.141.4 31.8 29.027 2.6 24.283.666.8 27.458.673 2.827 3.429 2.193 3.254 2.2 27.108.844.580 3.935 3.439.2 29.661 Canadian Domestic Gasoline Sales (M3) 2.2 26.599 2.2 22.114 3.661 Canada Avg ex tax RUL pump price (¢/l) 39.7 24.287.323 3.232 3.1 23.095.960.366 2.297 2.1 29.326.286.636.7 34.133 3.544 3.180 3.729.315 2.245.122.441.890.604 2.897 3.8 26.437.502 2.615 2.853 2.412 2.409.970 3.151.180.873.287 2.558.637 3.1 21.609.299 2.9 26.070.619 2.373.235 3.7 29.0 20.767.782 3.564 2.865. Inventory.8 21.218.566.775.499 2.047 2.716.035 2.1 22.097 2.521 2.968 3.287 2.011 2.743 2.853 3.884 2.113.141.251.313 2.501.7 28.295.301 2.202 3.285 2.612 3.688.250.621.9 19.733 2.779 2.218 3.132.176 2.045.7 24.6 23.869 2.876.102.565.2 27.085.5 23.429 2.693 3.7 31.7 29.810.015 3.361.263.894.081.030.9 22.938.457 2.5 27.9 29.864 2.808.880 Canadian Retail Gasoline Sales (M3) 2.900.427.2 21.9 23.

638 2.0 26.881.857.539.170 Canadian Retail Gasoline Sales (M3) 2.717.537.123.2 25.082.170 3.1 21.799 2.0 26.5 25.606.617 2.555.324.675 2.692.863.871 3.338 2.386 3.4 25.141 2.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.204.797.376. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 .4 26.370.8 24.264 2.7 21.620.048.346 2.6 20.796.198.077.195.261.505 2.112 3.2 25.148.006 3.703 3.7 22.984 3.184.607.648 3.658.889.205 2.9 22.997 2.679.906.753 3.5 21.214 2.264 2.9 29.097.928 3.480 2.219 Canada Avg ex tax RUL pump price (¢/l) 27.2 26.5 21.414 3.961.649.1 24.9 27.597 2.904.442 2.165.415 2.593.182.519.7 Canada Avg RUL Rack Price (¢/l) 20.317 2.469.382.970.601 3.294 3.649.840 2.994 3.244 3.6 20.919 2.977.830 3.320 3.179.8 28.644 3.344 3.155 2.806.222 2.074.130 3.386 3.999 3.324 2.0 25. demand.791 3.250.8 20.005 2.7 19.8 21.773.198 2.930.0 24.864 2.671.667 Canadian Domestic Gasoline Sales (M3) 3.198.390.0 25.055 2.467 2.965.614.4 26.5 source: Statistics Canada (production.483.940 2.656 3.4 20.336.521 2.714 2.363.669 2.516 3.149.068.566 3.936 3.8 25.986.785.315.426.825.037 3.660 3.

5 57.3 61.1 50.9 64.Table D: Pump Price History .5 57.9 57.1 41.6 48.3 52.8 51.9 61.0 61.5 55.2 62.9 52.8 41.9 56.2 62.0 62.4 55.7 54.6 58.4 53.2 62.9 56.5 57.2 50.8 56.7 50.2 65.5 47.5 57.5 58.9 63.9 58.5 59.4 49.3 42.6 62.7 46.4 52.5 58.4 55.5 57.8 Thompson 59.3 48.5 62.1 44.4 63.4 Winnipeg 49.2 50.2 54.9 54.9 61.5 59.9 44.8 53.8 50.7 65.5 57.9 56.8 52.4 56.4 53.4 50.4 46.7 52.0 61.7 50.9 61.5 59.4 57.5 50.5 58.9 56.8 48.2 62.6 54.6 49.5 58.7 45.5 45.0 62.9 55.5 57.5 59.1 55.9 61.0 52.3 49.2 63.9 47.3 50.1 52.5 59.5 56.2 62.8 57.5 58.7 65.Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.4 53.2 48.5 60.6 47.9 53.9 52.9 62.4 52.8 59.5 60.9 56.7 53.7 57.9 64.1 53.9 53.6 48.3 49.9 52.1 44.7 62.8 48.5 54.3 48.5 59.7 45.5 52.2 43.0 50.4 54.3 54.5 58.5 46.2 55.9 56.8 44.5 51.3 52.6 50.1 59.8 52.8 53.5 59.2 46.0 48.9 49.2 50.0 54.9 53.8 53.8 56.0 59.4 56.8 56.9 58.5 51.0 57.0 62.8 57.3 54.6 53.9 47.9 50.7 44.5 56.5 53.9 53.9 56.9 46.1 52.7 57.5 61.8 52.5 57.6 55.6 56.2 47.4 56.5 53.0 61.8 55.0 61.4 61.4 55.8 49.7 51.2 51.9 56.3 62.9 54.9 64.8 50.0 61.1 43.9 53.2 59.0 44.4 48.4 61.7 65.5 53.4 56.5 47.9 51.8 47.9 54.4 58.5 58.2 65.5 60.9 58.9 59.8 64.2 61.5 58.5 61.6 47.0 61.5 54.8 45.9 MJ ERVIN & ASSOCIATES 90 .7 49.9 56.8 52.5 52.4 55.7 62.9 48.4 55.2 58.9 51.5 59.9 47.6 54.1 56.0 55.7 54.1 55.5 60.3 55.1 50.3 55.2 62.7 52.6 46.6 47.2 56.6 55.1 49.9 44.9 53.6 44.9 52.5 58.3 56.0 Sioux Lookout 62.3 59.8 56.9 54.5 59.6 46.3 52.9 53.6 59.5 60.5 58.4 47.2 54.9 59.9 62.4 46.7 51.2 57.5 58.9 53.5 51.5 57.4 52.5 Vancouver 53.5 57.9 52.8 56.5 47.7 White Rock Calgary 45.7 53.9 61.6 50.9 49.0 59.3 51.5 45.8 59.5 60.6 58.4 52.3 52.5 51.5 57.4 59.5 57.0 52.0 46.7 48.5 58.4 54.4 61.9 58.4 58.9 51.1 49.5 56.7 51.6 52.4 55.9 52.9 54.9 64.4 56.6 53.7 63.9 53.9 56.9 54.5 51.7 48.3 52.2 54.9 55.9 53.8 48.2 46.2 62.4 57.0 39.8 56.9 54.4 54.9 47.7 65.1 49.0 61.9 56.6 51.9 55.4 52.2 51.9 58.4 56.5 49.5 56.5 55.9 61.2 46.1 53.2 51.7 54.3 50.9 54.9 45.5 57.8 47.5 56.4 65.8 54.9 57.1 55.4 46.2 62.2 62.6 48.0 58.9 53.9 64.7 53.2 Nanton Peace River Regina 49.8 53.9 51.7 65.8 52.1 60.9 52.9 55.9 49.8 48.

0 47.2 56.3 60.1 57.6 58.4 55.3 53.1 49.7 57.9 61.3 54.6 54.5 55.9 60.6 51.7 54.1 Toronto 52.2 58.0 49.1 56.5 53.6 59.1 58.6 63.5 61.0 59.0 53.4 54.9 57.9 56.6 52.8 54.1 55.5 51.9 53.6 54.7 53.7 46.8 54.1 55.2 58.6 52.9 60.7 59.3 55.8 52.1 54.1 56.5 57.2 60.5 59.7 56.7 64.6 55.1 52.6 54.2 54.2 54.8 52.6 58.2 55.2 Montreal 63.5 54.2 57.6 52.2 52.9 55.3 59.5 57.5 54.8 53.0 57.0 55.6 54.0 52.9 55.1 55.9 54.0 61.8 50.4 53.1 54.4 58.7 54.5 63.3 58.8 51.9 60.9 58.0 47.4 54.6 63.1 55.7 51.0 54.8 50.7 56.2 57.0 56.4 53.7 57.4 54.2 56.2 52.5 52.7 51.7 52.7 48.2 60.5 61.6 50.8 57.2 53.9 55.6 60.8 55.9 57.6 55.0 60.5 55.5 56.7 57.4 57.0 55.0 56.9 56.2 61.7 49.0 60.4 50.2 56.5 52.1 54.6 55.1 53.3 49.2 61.7 54.6 57.1 60.8 60.3 54.9 56.1 54.9 50.1 60.8 55.0 52.4 54.7 56.4 57.5 54.8 55.6 50.1 61.7 47.2 55.1 57.1 55.6 52.7 52.1 58.2 59.5 48.2 49.8 61.8 47.2 54.3 56.9 61.1 54.1 59.3 56.2 50.1 59.9 49.4 53.6 54.9 52.3 57.6 53.7 58.1 52.2 49.5 60.5 56.5 53.5 56.5 63.2 52.0 48.8 49.8 56.7 55.0 60.0 60.4 51.2 54.7 54.0 50.2 57.4 58.9 55.2 55.9 55.9 55.0 57.2 56.6 51.5 60.0 52.5 54.8 54.8 63.3 52.8 53.2 53.6 56.0 53.9 49.6 56.5 54.5 56.4 57.7 54.2 56.7 57.9 61.2 56.0 57.3 54.2 57.0 52.2 55.5 57.0 55.6 58.6 55.5 51.6 58.9 54.9 55.4 57.4 45.2 54.0 50.4 54.8 55.1 51.6 53.9 57.7 44.3 53.9 51.3 54.2 56.5 53.5 55.2 57.1 57.9 56.6 52.8 55.5 52.5 53.6 49.7 56.9 49.3 54.1 53.8 56.9 53.4 53.8 54.0 52.2 58.3 54.0 57.9 57.0 58.1 61.7 58.1 55.8 55.2 55.9 54.3 51.6 55.5 56.5 67.8 57.2 57.4 57.7 50.6 56.6 Canada Avg 55.4 54.5 54.2 49.0 54.1 58.4 52.5 52.3 54.6 49.3 56.0 59.0 54.4 58.0 54.9 64.7 59.6 61.7 60.9 53.4 51.9 61.2 59.0 48.6 54.3 54.0 52.6 59.3 55.5 58.0 53.4 58.3 53.0 59.1 56.2 Chicoutimi Gaspé Saint John 60.5 59.0 50.1 48.2 57.Table D: Pump Price History .2 55.4 52.9 53.5 57.6 61.9 61.1 53.8 55.6 52.4 58.3 55.3 59.0 51.4 58.6 55.8 59.5 61.4 54.0 55.3 59.1 52.3 52.2 57.7 48.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.1 53.4 54.9 62.3 55.7 51.4 55.2 57.1 53.8 49.6 63.0 51.6 51.8 57.6 52.0 55.5 51.0 61.5 63.9 58.9 63.9 64.5 Ottawa 58.3 53.2 51.2 51.8 61.3 53.6 53.3 55.8 Halifax Charlottetown 60.3 62.7 53.6 59.2 49.7 54.5 57.9 53.4 49.4 51.1 58.3 56.1 54.5 MJ ERVIN & ASSOCIATES 91 .6 58.4 57.5 64.3 55.7 51.3 56.0 55.8 55.7 56.6 54.5 51.2 57.7 56.7 52.1 51.7 57.2 56.5 54.6 53.2 61.9 55.5 59.1 61.8 50.3 52.9 55.6 55.9 64.9 49.3 61.2 53.2 51.0 56.3 54.3 52.6 50.9 55.6 56.1 51.8 60.8 53.3 59.5 64.3 49.4 60.

1 Apr-94 29.6 Aug-95 30.2 24.7 Jan-95 27.5 27.4 22.6 22.3 33.7 Sep-94 32.9 27.Table E: Ex-tax Pump Price History .0 26.6 24.7 24.3 30.2 Jun-94 31.9 30.3 Feb-95 26.6 23.4 29.6 30.4 23.8 28.3 31.0 31.7 30.6 27.4 20.4 Jun-95 30.0 25.4 29.4 25.2 29.4 30.6 30.0 23.5 24.6 30.4 23.6 25.4 31.9 24.0 23.1 Mar-95 29.3 27.7 29.6 28.9 28.3 24.9 24.7 28.5 27.2 22.8 24.3 29.7 28.6 27.5 27.3 26.0 24.4 29.9 30.0 May-92 28.7 26.9 28.5 29.3 21.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.8 26.2 28.3 29.3 26.4 29.9 24.0 29.7 25.2 28.8 29.6 26.8 27.7 Sep-95 30.3 29.9 26.6 29.1 27.9 25.9 26.6 Sep-93 28.8 24.5 Feb-92 28.8 23.2 26.4 20.5 21.9 Aug-93 30.7 28.0 24.1 Feb-93 29.7 26.5 29.3 26.9 21.1 22.7 30.5 25.2 Nov-92 31.0 25.0 Oct-93 28.2 25.3 32.4 28.8 29.3 Jan-93 30.8 21.2 32.5 Nov-95 30.4 Dec-92 31.7 26.7 29.7 Aug-92 24.0 23.3 29.5 29.5 28.3 29.3 30.2 27.0 Jun-93 26.7 28.2 Nov-94 29.7 28.4 31.8 22.9 27.9 28.8 27.5 26.5 24.4 25.5 Jul-95 30.1 24.2 24.7 27.1 24.3 24.5 23.9 21.2 29.8 26.2 26.4 25.5 23.8 25.4 24.8 Jan-94 25.5 27.6 29.3 29.1 30.6 26.0 27.2 27.4 31.6 May-95 29.8 28.4 MJ ERVIN & ASSOCIATES 92 .9 25.0 28.1 30.2 24.4 27.3 Jul-92 31.8 Dec-93 26.2 Dec-94 26.0 32.1 31.3 28.8 27.6 Jun-92 32.0 26.0 27.3 28.4 28.3 28.8 26.9 20.4 30.0 24.6 27.1 31.9 25.1 22.2 23.3 26.2 28.3 29.1 23.3 23.0 31.1 26.3 30.6 26.4 27.4 23.7 31.4 20.6 23.2 24.3 30.9 30.6 29.3 May-94 28.4 31.9 28.1 24.2 Nov-93 27.1 26.4 30.4 25.4 22.8 27.1 28.3 29.5 24.8 31.4 31.8 29.2 28.5 26.5 Jul-94 29.4 21.4 29.9 23.4 27.5 29.4 31.8 29.4 24.7 Jan-92 31.9 Oct-94 32.5 Oct-95 30.4 26.4 Mar-92 28.6 26.0 25.4 29.6 24.4 31.0 22.9 23.7 30.1 25.0 23.9 29.6 23.6 22.7 26.2 Apr-93 28.6 27.4 30.6 26.0 May-93 29.2 26.9 26.1 25.5 27.1 Apr-95 30.0 21.9 26.6 Mar-93 28.2 25.4 28.5 21.3 28.8 25.7 28.8 Toronto extax 26.3 24.3 Dec-95 Edmonton Regina extax extax 27.6 21.3 28.8 26.1 28.1 27.9 27.9 29.9 24.2 26.9 25.4 27.6 25.8 24.8 25.0 Apr-92 30.3 26.7 Mar-94 28.3 29.9 25.6 23.3 27.8 27.3 29.0 26.9 24.8 27.3 23.6 28.7 29.7 30.7 30.0 23.4 27.5 29.7 29.7 27.8 24.9 Jul-93 28.1 19.7 Winnipeg extax 27.6 26.8 Feb-94 24.4 25.9 27.9 31.1 25.1 20.6 26.5 Aug-94 28.7 24.4 29.1 25.6 29.6 26.8 28.9 29.5 Oct-92 30.5 Sep-92 29.4 22.

9 30.2 28.2 28.3 25.9 32.3 26.4 33.2 32.1 32.8 24.8 30.6 34.2 26.4 25.3 30.0 26.3 34.4 21.8 29.7 32.4 26.6 32.2 29.3 34.1 28.2 24.4 22.3 29.9 32.6 28.5 27.2 25.4 31.9 30.7 28.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.9 27.8 27.9 26.8 28.7 27.3 23.4 32.8 30.9 27.6 28.5 24.9 27.4 28.2 32.0 29.1 31.7 24.3 25.8 32.0 33.8 23.6 32.1 29.4 33.8 25.7 27.9 32.7 28.5 30.5 33.8 29.5 30.2 25.2 27.6 27.9 30.0 28.3 27.2 24.8 26.8 28.4 25.0 30.5 31.7 24.9 29.6 31.9 30.8 Canada Avg extax 29.0 34.2 27.4 33.2 22.4 25.7 26.6 23.0 31.6 36.4 32.7 24.6 28.1 30.9 29.5 25.1 24.9 28.6 26.3 28.1 24.5 26.8 28.5 29.7 22.8 26.7 32.0 25.4 31.3 27.8 29.0 29.9 26.1 30.3 29.2 22.8 32.4 25.0 28.5 25.5 28.9 26.9 37.7 23.6 26.6 26.6 26.6 27.3 31.0 23.4 36.2 28.7 26.6 34.0 36.7 34.8 25.7 26.8 27.6 Charlottetown extax 36.8 23.9 29.2 25.3 28.1 28.6 28.2 30.3 29.3 25.7 26.3 22.3 34.4 32.0 36.1 34.5 34.3 26.7 Quebec extax 32.5 25.0 33.6 32.8 25.7 27.2 27.2 27.5 24.9 33.9 29.6 25.3 35.5 27.Table E: Ex-tax Pump Price History .0 26.6 29.8 29.0 33.6 32.7 32.9 29.4 24.9 29.5 25.7 30.2 26.5 33.1 32.3 29.6 31.1 30.6 23.7 24.9 27.0 28.7 29.4 31.8 25.2 27.9 23.8 28.2 Saint John Halifax extax extax 34.8 28.2 27.4 26.8 33.1 34.5 28.7 28.2 23.1 25.5 30.9 27.6 22.0 25.0 26.2 36.9 30.3 33.2 30.5 27.1 34.7 33.8 29.3 24.9 35.7 23.2 27.1 26.0 29.3 31.0 34.1 Montreal extax 31.0 30.5 25.8 32.1 24.8 28.5 27.8 30.7 28.7 MJ ERVIN & ASSOCIATES 93 .8 36.0 27.2 27.6 29.5 25.2 21.6 32.6 25.7 24.8 23.7 30.1 29.9 24.8 27.3 26.3 31.4 36.0 23.0 33.2 27.5 36.9 31.2 26.4 24.8 33.2 36.0 28.5 31.3 31.8 32.2 30.9 33.2 34.7 34.7 25.7 29.2 32.3 28.4 26.8 26.2 26.5 28.0 25.1 24.9 31.4 34.1 32.8 23.0 28.1 32.6 28.3 25.7 23.4 33.7 27.4 28.2 22.4 27.4 33.8 27.2 33.6 33.1 23.3 28.9 28.3 31.7 26.1 26.2 33.6 27.5 26.8 26.6 33.5 33.9 32.2 26.3 28.0 32.7 28.3 29.0 32.0 34.7 26.0 33.5 28.9 29.6 36.5 32.1 22.1 29.2 22.8 26.6 24.2 25.

2 19.1 22.5 20.4 20.2 20.7 18.3 20.2 18.1 18.1 20.4 23.3 22.5 27.0 22.2 19.1 21.0 20.9 21.5 19.3 23.3 18.5 24.2 23.3 20.1 21.5 17.8 18.1 24.8 19.3 18.9 22.7 21.7 17.4 24.6 19.5 22.8 19.0 23.2 21.9 21.5 21.5 22.6 23.5 18.8 22.1 Halifax rack 20.3 19.9 19.5 17.3 17.9 18.9 22.3 21.5 17.9 17.6 23.2 21.7 23.7 MJ ERVIN & ASSOCIATES 94 .6 25.3 23.8 23.5 24.0 22.5 23.8 24.1 20.9 21.2 22.1 15.2 20.2 19.6 23.4 21.6 23.8 23.2 20.7 21.7 21.5 19.4 21.8 20.1 23.8 20.7 20.2 21.6 20.6 20.1 20.6 19.3 22.1 22.3 23.7 22.2 17.8 23.7 17.5 22.8 27.0 22.1 23.8 21.0 19.0 22.3 22.5 21.2 Quebec city Montreal rack Toronto rack rack 19.6 19.4 23.8 20.3 23.8 19.7 22.5 20.3 17.8 22.2 20.8 21.5 22.0 23.5 22.7 19.0 20.1 19.4 23.4 22.2 18.3 26.3 23.1 21.4 22.1 21.2 29.1 22.Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.5 21.3 19.1 21.4 22.7 21.0 23.1 20.5 20.6 25.9 22.3 21.9 21.0 22.1 21.2 23.4 17.4 21.5 21.4 22.3 17.5 20.2 21.1 22.7 21.0 23.0 21.8 18.4 21.4 20.7 21.2 21.3 19.3 21.0 21.4 22.9 22.0 21.8 18.9 22.7 22.9 21.1 16.0 21.3 21.8 22.0 23.4 21.1 20.9 20.9 22.2 23.4 21.0 19.3 22.8 21.2 22.4 21.4 21.2 16.1 23.8 25.3 23.2 20.2 18.4 19.8 23.5 21.4 20.0 21.8 21.7 21.2 21.1 22.9 20.7 22.4 21.6 20.0 22.6 20.4 21.3 20.4 20.4 22.5 23.0 23.6 23.0 21.2 22.7 22.8 22.8 20.1 15.0 24.9 20.8 23.3 24.8 Ottawa rack Thunder Bay rack 20.4 21.4 21.2 21.6 21.8 21.2 21.4 22.9 18.7 22.1 19.7 22.3 23.9 24.8 21.5 23.1 22.3 18.6 20.7 16.4 22.3 19.4 15.8 20.9 18.6 20.8 22.9 22.8 20.7 20.8 19.8 18.7 20.0 23.2 23.2 18.6 21.9 25.3 24.1 20.8 23.9 23.4 22.6 22.0 23.1 20.1 22.4 21.1 19.6 25.9 21.7 23.2 16.5 21.5 21.1 21.5 18.6 23.7 22.4 22.0 21.7 18.4 18.6 19.8 23.1 20.0 19.3 21.9 23.1 21.6 18.7 22.7 19.7 17.2 20.6 19.4 20.2 18.4 23.3 20.5 21.9 18.Table F: Rack Prices .4 22.5 24.6 19.2 16.5 22.6 20.5 26.

0 22.4 20.9 22.3 23.0 22.7 21.7 22.1 21.2 23.8 22.6 22.2 22.1 21.4 21.7 17.9 17.5 23.5 24.0 21.2 22.6 21.4 25.7 24.4 23.5 21.3 22.2 20.0 24.1 22.1 19.7 24.2 22.0 18.6 19.7 23.9 21.7 22.3 23.6 23.0 24.9 21.1 23.3 20.5 20.0 21.1 21.9 24.4 21.4 21.6 21.8 20.5 22.5 18.8 21.7 24.1 20.3 22.1 19.6 19.9 23.2 21.8 23.2 20.8 21.Table F: Rack Prices .1 18.2 22.9 20.5 19.3 24.8 24.9 19.8 24.7 21.8 18.5 20.5 21.0 23.6 20.9 24.9 24.8 20.0 22.5 23.7 21.1 23.3 22.5 21.0 24.2 18.9 21.0 23.9 23.7 22.9 23.2 23.5 21.3 23.8 20.5 24.9 21.9 22.0 23.4 24.4 23.8 21.0 20.2 19.7 25.0 22.1 23.1 21.6 23.8 Vancouver Victoria rack rack 24.3 17.6 17.1 20.7 22.9 23.1 17.8 22.3 18.9 19.6 21.8 24.7 20.4 22.5 24.6 20.5 21.2 21.6 25.5 19.6 17.9 22.9 23.9 20.3 23.9 23.1 16.8 20.1 23.4 24.4 21.6 21.6 23.4 23.8 25.3 20.4 22.4 24.7 21.9 21.2 23.7 21.1 23.7 21.1 22.6 21.6 25.4 21.8 21.1 23.0 23.6 21.7 23.4 18.4 22.9 21.5 23.2 24.3 17.5 20.7 25.5 17.1 25.6 23.7 21.6 24.8 23.1 24.3 23.6 23.9 18.3 20.9 20.9 18.2 21.9 22.3 21.7 22.6 24.1 21.5 18.0 18.3 23.5 21.7 22.2 24.9 21.1 25.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.5 Canada avg rack 22.6 20.5 23.4 24.0 22.2 Edmonton Rack 23.6 22.5 22.0 17.2 22.2 21.4 21.5 21.7 22.3 19.3 22.7 21.1 22.8 22.3 17.0 20.2 22.2 21.7 21.2 24.5 20.5 23.1 22.0 21.5 22.7 22.1 23.2 22.3 21.6 22.8 19.1 23.5 21.0 22.1 23.5 21.2 24.2 19.8 20.3 24.2 20.9 19.2 23.5 23.4 19.0 22.6 20.6 23.0 21.5 21.8 23.5 22.1 21.6 23.2 23.0 21.4 20.7 22.9 22.5 24.2 23.2 24.6 21.3 21.1 22.5 19.1 20.7 21.7 21.1 21.6 21.7 21.9 21.8 23.5 19.3 20.4 22.0 24.1 21.7 23.8 22.7 18.9 22.9 19.2 20.0 20.3 24.7 17.6 23.7 23.5 22.9 19.0 25.7 19.2 20.4 19.0 17.4 21.6 21.5 MJ ERVIN & ASSOCIATES 95 .1 22.1 25.0 22.7 23.0 20.6 21.3 21.3 23.9 19.1 18.4 21.5 23.9 22.1 16.9 22.3 19.7 22.4 23.8 22.4 22.6 25.5 22.6 22.1 23.9 19.9 22.2 22.0 23.8 22.9 21.3 24.

90 63.00 57.832 91.120 570.246 2.060.529 123.150 48.636.448.26 44.119 632.28 65.621 102.78 67.830 2.245 351.13 58.101 447.220 389.72 74.18 51. MJ ERVIN & ASSOCIATES 96 .20 59.30 63.513 19.22 59.10 53.890 2.438 591.745.834 71.056.26 49.00 67.45 53.20 60.20 58.204.483 63.334.23 63.214 248.40 61.241 451.65 54.66 50.Table G: Study Market Data .669 203.985 636.00 48.113 2.73 65.749 91.42 53.153 316.93 63.30 54.234 799.03 58.194.72 58.94 55.543 2.141.018 2.30 68.00 62.549 111.897 350.983 1.97 51.53 61. and All Study Markets are weighted (by market population) averages.018.014 3.903 33.859 240.483 2.89 60.50 56.971 473.905 183.30 54.72 63.40 54.90 62.516.25 57.922 103.093.32 51.557.70 49.671 399.19 52.60 60.101 256.597 2.614 3.102 98.30 66.850 126.48 56.420.23 53.40 63.400 142.508 2.88 64.698 Note: Regional.74 57.17 Diesel 64.412 722.07 61.935 758.811 120.192 2.300 578.238 2.332 101.704.00 66.19 49.50 55.000 1.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661.475 1.972 429.895 600.628 702.50 56.53 48.40 58.000 63.26 63.268 478. Urban.02 51.90 67.87 61.554 2.83 68.24 61.35 73.030.858.80 64.000 217.10 63.643 184.377 30.86 56.749 243.712 1.894 1.414 450.166 102.38 56.678.980 120.20 54.10 52.145.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63.85 54.687 1.000 1.997 397.11 58.945.949 1.16 59.34 63.20 61.211 15.60 50.250 748.173 568.60 49.60 70.298 576.88 54.174.837 329.058 2.196 669.625 64.370 41.009 54.89 61.89 65.796 2.933 25.97 63.052 84.55 58.770 2.686 273.00 57.30 52.500 378.249.296 179.36 54.40 59.30 57.98 59.702.702 333.796 529.92 51.70 55.790 185.85 48.460 833.620.10 59.45 63.810.

76 24.90 27.43 21.45 23.43 28.08 23.04 26.64 28.54 28.95 22.91 21.65 21. and All Study Markets are weighted (by market population) averages.Rack Price.93 23.23 26.73 32.95 22.33 21.88 22.39 22.45 22.59 24.42 24.43 21.45 20.01 28.93 27.81 25.55 28.55 28. Tax (by Grade) Rack Pt.83 24.21 27.16 29.69 27.17 20.97 25.76 25.08 25.15 29.07 24.74 21.07 24.56 22.42 27.88 28.92 21.45 20.42 25.93 23.97 23.34 25.26 28.63 28.99 28.28 23.59 22.27 29.53 23.49 21.84 28.06 28.88 28.47 28.47 20.45 28.45 20.89 25.07 24.40 27.75 22.23 23.48 25.59 28.92 20.26 27.89 28.57 29.51 31.15 20.45 20.33 22.11 26. MJ ERVIN & ASSOCIATES 97 .30 29.65 27.02 23.51 25.90 26.33 27.21 27.32 21.36 26.31 22.97 22.25 27. Urban.85 28.51 25.42 24.34 20.94 23.45 24.89 26.35 25.36 24.15 27.20 20.95 Premium 26.32 33.63 21.33 21.63 24.33 22.41 27.33 22.16 21.88 20.03 20.82 21.81 21.27 20.87 26.58 25.34 26.83 23.92 30.07 26.89 29.23 25.63 25.20 27.Table H: Study Market Data .81 28.65 26.07 26.47 27.95 25.43 20.88 22.39 21.98 25.15 24.39 Note: Regional.16 22.45 29.73 26.68 Diesel 36.81 27.28 22.88 20.45 25.96 22.75 27.84 28.98 28.13 23.83 24.03 21.18 28.83 22.33 21.39 22.82 28.39 21.45 29.45 24.23 24.50 20.57 22.63 20.96 24.43 20.83 25. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26.38 24.92 22.18 25.83 24.49 25.63 26.49 31.51 20.50 25.25 28.37 27.09 27.04 24.99 26.49 21.33 21.96 24.25 31.03 24.09 24.59 28.38 24.41 22.25 24.78 Product taxes Midgrade Regular 26.01 22.59 22.40 25.69 23.33 21.59 28.

01 0.94 17.96 27.20 5.11 31.06 0.96 3.96 25.83 12.23 7.13 28.97 0.62 56.83 21.03 28.56 24.15 66.59 4.77 30.77 37.41 7.24 7.26 27.22 5.02 3.22 14.38 7.27 62.34 1.94 22.03 7.08 0.21 8.86 49.06 28.21 24.41 29.033 0.32 31.17 9.44 33.60 23.88 31.75 23.37 26.07 30.79 0.86 28.81 28.35 60.17 11.98 1.43 23.28 27.73 22.91 0.95 6.17 26.82 3.98 0.10 6.49 57.08 17.04 23.27 60.53 6.31 0.07 0.11 26. Variance uses the formula [n∑x2 .52 30.18 55.77 5.85 24.45 1.89 0.91 29.89 28.14 7.99 0.16 3.18 21.36 0.35 28.66 28.79 33.64 1.23 38.84 28. Costs.00 22.82 32.51 11. MJ ERVIN & ASSOCIATES 98 .(∑x)2 ]/n2.85 11.60 7.36 20.07 0.70 22.06 5.12 23.27 6.27 11.17 1.35 27.26 5.72 26.13 0.93 22.20 14.68 2.44 25.45 6.73 10.53 22.01 31.00 58. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.53 21.39 56.14 60.30 12.02 22.68 7.80 9.80 1.85 26.04 0.24 23.96 28.48 7.08 3.91 22.50 10.50 58.30 5.85 21.57 12.58 1.12 6.38 28.35 58.18 7.04 22.50 3.50 0.28 56.83 1.31 34.63 58.29 8.08 55.60 14.47 0.22 1.13 11.05 6.Table J: Study Market Data .31 28.56 4.98 31.94 Note: Regional.82 95 Retail Gross Product Margin 6. and All Study Markets are weighted (by market population) averages.68 7.88 5.99 2.49 2.64 3.33 9.95 21.41 12.64 2.10 3. Average Deviation is the average deviation of the market values from their mean (average) value.16 20.92 22.73 1.16 54.73 2.43 0.83 27.19 5.83 36.89 21.28 1.58 66. Urban.98 0.52 5.64 3.28 1.54 50.90 59.00 0.04 28.38 2.31 23.91 2.75 28.02 0.24 7.29 24.81 26.78 2.33 .00 4.42 2.76 5.47 58.44 56.Blended Prices.63 60.90 23.34 0.02 13.30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57.21 8.93 56.26 3.38 0.71 33.84 5.38 22.29 7.25 1.

011.852) $ 119.510 $ 60.209 $ 82.089.688 $ 85.630 3.626 $ 81.004.966 3.827.250.467 $ 96.900 $ 179.095.948 3.707 $ 260.098 $ (320.081 $ 222.564 $ 252.068 3.375) $ (49.129 $ 97.098.074 $ 131.217 2. For 95 net retail petroleum revenue.302 $ 69.856 3.638 2.241) $ (227. outlet costs.900 2. Urban.000) $ (241.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.677 $ 180.779 $ 121.Sales.934 3. Outlet Costs.526 $ 207.885.871) $ (128. Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3.956) $ 200.716 Note: Regional.993 $ 113.750 $ 271.279 $ 154.805.247 4.766) $ (274.135 $ 199.890.875 $ 255.694 3.465.995 $ 234.557) $ 102.263 $ 60.246 $ 118.855 $ 278. and consolidated outlet income these averages are based only on those markets with available data.000 $ 156.197.265.120 $ 54.117 $ 207.244 95 net retail Ancillary Revenue petroleum revenue $ 208.000 2.604.010 1.542 $ 222.023 $ (15.622 $ 174.014.658. and All Study Markets are weighted (by market population) averages. but for ancillary revenue.550 694.640 4.144 2.572) $ (286.429 $ 238.913 $ 139.632 $ 256.772. these averages are based on all applicable study markets.394.367) $ (164.058.837 $ 56.143) $ (249.794 3.289 981.648 3.646) $ (98.780 $ 85.332) $ (238.272 $ 118.746 $ (374.157. MJ ERVIN & ASSOCIATES 99 .223.013 $ 227.481 $ 96.719 3.478 4.071.623 2.544 $ 175.209 $ 26.032 $ 77.067 $ 92.800 $ 225.295 $ 174.272 $ 210.102 $ 223.208) $ (226.866) $ (244.911) $ (166.520 5.Table K: Study Market Data .542.550 $ 177.224 $ 189. Revenue.066 3.502 $ (80) $ 60.

06 1 5.22 3. MJ ERVIN & ASSOCIATES 100 .24 0.400 74.23 8 31.40 1 3.68 4 7.975 2.000 pop’n No.30 0.604 3.014 5.88 11 8.02 0.50 9.60 11 7.004 3.52 13 5.675 179.605 16. rank* 3.98 7.30 1.28 17.585 6.20 0.84 12 5.475 3. of Outlets No.890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6.80 10 4.60 3.10 3.21 0.157 2.73 14.43 12.38 0.41 0.223 3.06 5.50 8.20 17 14.542.76 18 5.88 12 7.00 11.658 3.45 0.48 7 7.54 6 2.29 8 7.275. N refers to study sample size (total = 481).Table L: Study Market Data .03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”.715 14. inverse ranking is used (lowest value = 1).98 6.095 3.27 0.36 5.79 6.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10.91 17 4.89 7.395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No.45 14.94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3.53 10 6.91 12.33 0.08 16 3.775 678.23 6 7.827 3.08 4 2.745 16.13 2 11.97 8.01 7 2.96 5.50 3 10. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.Demographic Profiles Population pop’n 299 .250 981 2.315 710.265 2.42 5 14.47 7.41 1.790 1.145 81.058 1.17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6.55 19 11.85 15 11.06 16 4.73 5 10.22 0.04 15 4.47 14 3.845 15.95 3 9.071 2.870 120.775.970 330. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0.27 1.40 9 4.180 616.08 3.089 3.29 1. of Brands No.51 9 11.465 694 3.394 2.310 1.17 19 9.098 4.90 13 4.89 2 4.550 1.

and in doing so. accessible through a public fax-back dial-in system. bulk. Vice President Public Affairs Address: 275 Slater Street. Ottawa ON. Ottawa ON. aviation and lubricants marketing channels. Principal Address: #400. generate jobs and growth. safety and business issues. health. Petroleum Products Address: 235 Queen Street. a series of studies whose goal is to strengthen Canada’s competitiveness. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF). They maintain a large database of historical prices at most major centres.14th Street NW Calgary AB. cardlock. Ervin. Contact: Cindy Christopher.com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices. Senior Advisor. 119 .III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. The SCF is the basis for this study. Contact: Maureen Monaghan Address: 580 Booth Street. K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 . Contact: Michael J. and provide background resources to industry public affairs managers and the media. MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry. K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc. T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision. They work with major oil companies in benchmarking performance in the retail. Ottawa ON. Contact: Brendan Hawley.

Contact: Len Bradley.Octane Magazine Octane is Canada’s refining and marketing trade journal.T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. Energy Section Address: Statistics Canada.6th Ave. K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 . Executive Director Address: 214. SW Calgary. The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms. Supervisor. no 45-004) is a useful source of supply and demand volume data. Ottawa ON.ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures. Managing Editor Address: Suite 2450. 101 . non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry.6th Avenue.ab. Contact: Robert Curran. ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf. Its monthly publication “Refined Petroleum Products” (cat. and is a useful “window” on this industry. Octane is published quarterly. It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation. Contact: Gerard O’Connor. Calgary AB. 311 .

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